Costs that have the highest savings
To achieve the highest savings, Steven Smith should target variable costs. For the company to increase profitability or save money, it needs to incur some costs. These costs can be in the form of upgrading the machines and other equipment to improve efficiency. Fixed costs remain constant irrespective of changes in volume (Hwanyong, Haksoon & Simpson, 2015, p. 253). However, variable costs are affected by the level of volume and are directly related to the level of output. A company can be able to improve profitability by targeting variable costs because they have a direct impact on profitability. Therefore, White should be more concerned about variable costs that have a direct impact on revenues. A company can reduce variable costs while keeping other costs constant to improve its profit margin.
However, reducing variable costs should not be allowed to affect the quality of the product (Underwood, Bush & Heath, 2009, p. 1418). White should target fluctuating costs (variable costs) such as advisement costs, sales commission, freight costs and salaries first, before reducing fixed costs. If the company intends to achieve high profitability, it can reduce variable costs, but the sales volume should remain unchanged (Conine, 2013, p. 126). Moreover, if the managers decide to reduce variable costs, they must not be allowed to affect the quality of the product. Therefore, even if the volume of sales decreases, a decline in gross profit margin should be less than the impact of reducing variable costs. The company can also be able to cut salaries, advisement costs and sales commission without decreasing sales revenue (Machuga & Smith, 2013, p. 183). However, it is easy to reduce variable costs than fixed costs because they can result in more financial pain for the company in the long run.
How the decision will affect the value chain
The operational, sales, and marketing value chain will be affected by cost-saving strategies that will be implemented. If the company decides to reduce variable costs such as salaries, the operational department will be negatively impacted since they will be a shortage in the number of active workers. Therefore, the current employees will have to work overtime which is likely to affect their morale and productivity. Moreover, if the company decides to reduce sales commission, the ability of the company to make more profits will be minimal.
Ways the company will be affected by the decision to cut costs
Choo and Tan (2011) noted that reducing variable costs would have a long-term impact on the company especially if it decides to reduce the number of workers without upgrading operational machines. The existing workforce might be forced to overtime to achieve the goals of the firm. This will likely lower their motivation, which will have direct consequences on operational efficiency. In the long term, it will increase operational expenses thus reducing the profitability, which it was intended to improve. Machuga (2012) argues that reducing variable costs might affect the product quality or service quality that will have a direct impact on sales. If the quality of a product is reduced, sales will decline because customers will prefer other products in the market that meets their standard. Therefore, in the long run, sales will decline which is likely to affect the long-term sustainability of the company. Therefore, if the company intends to increase profitability, a decrease in variable cost must not be allowed to affect the quality of the product because it will have a long-term negative impact on profitability.
References
Choo, F., & Tan, K. B. (2011). An Income Statement Teaching Approach for Cost-Volume-Profit (CVP) Analysis by Using a Company’s CVP Model. Journal Of Accounting & Finance (2158-3625), 11(4), 23-36.
Conine Jr., T. E. (2013). Integrating Standard Cost-Volume-Profit and Degree of Operating Leverage with Accounting Variance Analysis. Journal Of Financial Education, 39(3/4), 121-139.
Hwanyong, K., Haksoon, K., & Simpson, J. (2015). Financial Analysis for Profitability Improvement: A Case Study of an HMMA Supplier. International Journal Of Business Management & Economic Research, 6(5), 249-255.
Machuga, S. (2012). A Case Method Approach to Teaching Cost-Volume-Profit Analysis. Journal Of Accounting & Finance (2158-3625), 12(5), 104-109.
Machuga, S., & Smith, C. (2013). A Case Method Approach of Teaching How Cost-Volume-Profit Analysis is Connected to the Flexible Budgeting Process and Variance Analysis. Journal Of Accounting & Finance (2158-3625), 13(6), 178-192.
Underwood III, J. H., Bush, R. P., & Heath, W. C. (2009). Picture the numbers: a conceptual illustration of linking marginal reasoning, marketing actions, and pro forma CVP analysis with a spreadsheet picture. Journal For Advancement Of Marketing Education, 34(3), 1413-1422.