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Problems On Cost Reduction Strategies

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17 views4 pages

Problems On Cost Reduction Strategies

Uploaded by

abhi kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Cost Concepts, Classification & Behaviour

Unit-02

Problems on Cost Reduction Strategies


For Problem 1 to 5 - Being a qualified Management Accountant, what
would be your advice
1. Labor Cost Reduction: Scenario: The company is considering reducing labor
costs by implementing automation in its production process.

Current Labor Cost per Month: $50,000


Automation Implementation Cost: $20,000
Expected Monthly Savings after Automation: $30,000

2. Supply Chain Optimization: Scenario: The company decides to optimize its


supply chain by negotiating better terms with suppliers, reducing lead times, and
minimizing inventory carrying costs.

Annual Inventory Carrying Cost: $60,000


Annual Savings from Inventory Reduction: $20,000
Annual Cost Reduction in Transportation: $10,000

3. Energy Efficiency: Scenario: The company implements energy-efficient


technologies to reduce electricity costs.

Current Monthly Electricity Cost: $5,000


Monthly Savings after Energy Efficiency Measures: $1,000

4. Process Improvement: Scenario: The company identifies and eliminates


inefficiencies in its production process, reducing waste and labor costs.

Current Monthly Production Costs: $80,000


Monthly Savings after Process Improvement: $15,000

5. Overhead Cost Reduction: Scenario: The company consolidates office space and
renegotiates leases to reduce rent and utilities costs.

Current Monthly Overhead Costs: $15,000


Monthly Savings after Consolidation: $3,000
6. ABC Manufacturing is a company that produces widgets. They are currently facing
challenges with high production costs. The management is exploring cost
reduction strategies to improve profitability. Below are some financial data for
ABC Manufacturing:

 Current annual production cost: $2,000,000


 Average selling price per widget: $50
 Annual sales volume: 100,000 widgets
 Variable cost per widget: $30
 Fixed overhead cost: $400,000
 Direct labor cost: $300,000
 Other operating expenses: $100,000

Problem:

Calculate the following:

(i) Current annual profit:


 Current annual profit = (Annual Sales Revenue) - (Annual Production Cost)

(ii) Contribution Margin:


 Contribution Margin = (Selling Price per Widget) - (Variable Cost per
Widget)

(iii) Break-Even Point (in units and dollars):


 Break-Even Point (in units) = (Total Fixed Costs) / (Contribution Margin
per Widget)
 Break-Even Point (in dollars) = (Break-Even Point in units) * (Selling Price
per Widget)

(iv) If ABC Manufacturing reduces its fixed overhead cost by $100,000 through
efficiency improvements, recalculate the break-even point (in units and dollars).

(v) Suggest one additional cost reduction strategy ABC Manufacturing can implement
to further reduce its production costs.

7. XYZ Manufacturing is a company that produces electronic gadgets. They want to


reduce their operational costs by improving their manufacturing process. Here is
some financial data for XYZ Manufacturing:

 Current annual production cost: $5,000,000


 Average selling price per gadget: $200
 Annual sales volume: 25,000 gadgets
 Variable cost per gadget: $120
 Fixed overhead cost: $1,000,000
 Direct labor cost: $600,000
 Other operating expenses: $200,000
XYZ Manufacturing has identified a cost reduction strategy that involves implementing
process improvements, which is estimated to save $300,000 in annual production costs.

Problem:

Calculate the following:

(i) Current annual profit

(ii) Current contribution margin

(iii) Calculate the company's current break-even point (in units and dollars):
 Break-Even Point (in units)
 Break-Even Point (in dollars) = (Break-Even Point in units) * (Selling Price
per Gadget)

(iv) Calculate the new annual profit after implementing the cost reduction
strategy (savings of $300,000).

(v) Calculate the new break-even point (in units and dollars) after implementing the
cost reduction strategy.

(vi) Calculate the degree of operating leverage (DOL) before and after
implementing the cost reduction strategy.

8. XYZ Manufacturing is a company that produces electronic gadgets. They are


looking to improve their cost structure by implementing various cost reduction
strategies. Here's some financial data for XYZ Manufacturing:

 Current annual production cost: $8,000,000


 Average selling price per gadget: $200
 Annual sales volume: 50,000 gadgets
 Variable cost per gadget: $120
 Fixed overhead cost: $2,000,000
 Direct labor cost: $1,000,000
 Other operating expenses: $500,000

Problem:

(i) Calculate the following for XYZ Manufacturing:


a. Current annual profit.
b. Current contribution margin.
c. Current break-even point (in units and dollars).

(ii) XYZ Manufacturing is considering implementing two cost reduction


strategies:
Strategy A: Reducing direct labor costs by $200,000 through automation.
Strategy B: Negotiating better supplier contracts to reduce variable costs per
gadget by 10%.

Calculate the potential impact of each strategy on annual profit, contribution


margin, and the break-even point.

(iii) Calculate the new break-even point (in units and dollars) if XYZ
Manufacturing implements both Strategy A and Strategy B.

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