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

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:

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.