As Guillermo Furniture store evolves, the manager must find more effective ways to analyze the company’s costs. To do this, he will use a myriad of tools, including choosing a control system. To further assist in decisions, the manager will compute the return on investment, residual income, and economic value added for the current situation. He also will be looking at the effects of selling the flame retardant separately by using a break-even analysis. The manager can make more informed and profitable decisions once the compiled data is examined.
Cost Relationships and Decision-Making
Managers make decisions to solve problems and take advantage of opportunities. Decisions fail because managers rush to make a decision or they misuse sparse resources. Guillermo’s thin margin of profit, high cost of labor, and strict competition make it difficult to cut costs. An option of converting to a competitor’s production method is available and would reduce labor costs, but the investment would require a large amount of capital.
The cost drivers for Guillermo are labor and material costs. The major costs that Guillermo can control are the cost per unit of material and the wages earned by the employees per unit produced. The employees receive a total of $300 per mid grade unit and $450 per high-end unit, plus an additional 10% of those prices as commission. One tool would be that management would change that employees were paid per unit versus an hourly wage rate. The employees will have an incentive to work faster because they will be working for the income paid per unit in the variable cost section, and the result is an increase in production. Another option is management can decide to purchase less expensive materials. The current costs are $250/high end unit, $140/mid grade unit, $25/coating unit, and $2/flame retardant unit. The best method to reduce the costs would be to hire more workers to produce more units and pay less of the overhead to...