(solution) Managerial Analysis BYP 9-2 Prasad & Green Inc. manufactures

(solution) Managerial Analysis BYP 9-2 Prasad & Green Inc. manufactures

Managerial Analysis

BYP 9-2 Prasad & Green Inc. manufactures ergonomic devices for computer

users.

Some of their more popular products include glare screens (for computer

monitors), keyboard

stands with wrist rests, and carousels that allow easy access to

magnetic disks. Over

the past 5 years, they experienced rapid growth, with sales of all

products increasing 20%

to 50% each year.

Last year, some of the primary manufacturers of computers began

introducing new

products with some of the ergonomic designs, such as glare screens and

wrist rests, already

built in. As a result, sales of Prasad & Green’s accessory devices have

declined somewhat.

The company believes that the disk carousels will probably continue to

show growth, but

that the other products will probably continue to decline. When the next

year’s budget was

prepared, increases were built in to research and development so that

replacement products

could be developed or the company could expand into some other product

line. Some

product lines being considered are general-purpose ergonomic devices

including back supports,

foot rests, and sloped writing pads.

The most recent results have shown that sales decreased more than was

expected for

the glare screens. As a result, the company may have a shortage of

funds. Top management

has therefore asked that all expenses be reduced 10% to compensate for

these reduced

sales. Summary budget information is as follows.

Budgetary Planning

Direct materials $240,000

Direct labor 110,000

Insurance 50,000

Depreciation 90,000

Machine repairs 30,000

Sales salaries 50,000

Office salaries 80,000

Factory salaries (indirect labor) 50,000

Total $700,000

Instructions

Using the information above, answer the following questions.

(a) What are the implications of reducing each of the costs? For

example, if the company

reduces direct materials costs, it may have to do so by purchasing

lower-quality

materials. This may affect sales in the long run.

(b) Based on your analysis in (a), what do you think is the best way to

obtain the $70,000

in cost savings requested? Be specific. Are there any costs that cannot

or should not

be reduced? Why?