Business Application Case Analyzing costs reductions at Dell
On May 31, 2007, Dell, Inc. announced it was making several changes to the way it did business in order . . . to restore competitiveness to the core business, re ignite growth, and build solutions critical to customer needs.” As one of the changes the company
Required
a. Other than the obvious reduction in salary and wages expenses, identify some costs savings Dell might realize by reducing its workforce by 10 percent.
b. Assume some of the workers being terminated are assembly employees and that they are being replaced by new robotic assembly machines. Explain how this might affect Dell’s unit level, batch level, and/or facility level costs.
c. Consider the additional information presented below, which is hypothetical. All dollar amounts are in thousands, unit amounts are not. Assume that Dell decides to eliminate one product line, Delta, for one of its segments that currently produces three products. As a result the following are expected to occur.
(1) The number of units sold for the segment is expected to drop by only 40,000 because of the elimination of Delta, since most customers are expected to purchase an Alpha or Beta product instead. The shift of sales from Delta to Alpha and Beta is expected to be evenly split. In other words, the sales of Alpha and Beta will each increase by 80,000 units.
(2) Rent is paid for the entire production facility, and the space used by Delta cannot be sublet.
(3) Utilities costs are expected to be reduced by $18,000.
(4) The supervisors for Delta will all be terminated. No new supervisors will be hired for Alpha or Beta.
(5) The equipment being used to produce Delta is also used to produce the other two products. The company believes that as a result of eliminating Delta it can eliminate some equipment that has a remaining useful life of five years and a projected salvage value of $20,000. Its current market value is $30,000.
(6) Facility level costs will continue to be allocated between the product lines based on the number of units produced.
Product line Earnings Statements |
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Annual Costs of Operating Each Product Line |
Alpha |
Beta |
Delta |
Total |
Sales in units |
400,000 |
400,000 |
200,000 |
1,000,000 |
Sales in dollars |
$400,000 |
$400,000 |
$200,000 |
$1,000,000 |
Unit level costs: |
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Cost of production |
40,000 |
40,000 |
22,000 |
102,000 |
Sales commissions |
5,000 |
5,000 |
2,000 |
12,000 |
Shipping and handling |
9,000 |
8,000 |
4,000 |
21,000 |
Miscellaneous |
3,000 |
2,000 |
2,000 |
7,000 |
Total unit level costs |
57,000 |
55,000 |
30,000 |
142,000 |
Product level costs: |
||||
Supervisors’ salaries |
4,000 |
3,000 |
1,000 |
8,000 |
Facility level costs: |
||||
Rent |
40,000 |
40,000 |
20,000 |
100,000 |
Utilities |
50,000 |
50,000 |
25,000 |
125,000 |
Depreciation on equipment |
160,000 |
160,000 |
80,000 |
400,000 |
Allocated companywide expenses |
10,000 |
10,000 |
5,000 |
25,000 |
Total facility level costs |
260,000 |
260,000 |
130,000 |
650,000 |
Total product cost |
321,000 |
318,000 |
161,000 |
800,000 |
Profit on products |
$ 79,000 |
$ 82,000 |
$ 39,000 |
$ 200,000 |
Prepare revised product line earnings statements based on the elimination of Delta. It will be necessary to calculate some per unit data to accomplish this.