Steve Smith has completed a forecast of cost-volume-profit analysis for the Swiss Chocolate Manufacturing Company's U.S. division manufacturing plant for the coming year. Smith notes the decline in volumes and prepares the breakeven analysis and computes the margin of safety; he notes that the current production volume projections indicate that the margin of safety will be positive for the period. However, the company will not achieve the sales volume required to achieve its desired level of operating and net income. In addition, the degree of operating leverage is high. Rick White has been tasked with suggesting some cost savings by the vice president of operations.
In a written paper, discuss the following.
- Given the fact pattern above, identify whether White should seek reductions in variable or fixed costs for the greatest impact on the forecast.
- What types of costs might White suggest for potential savings based on your answer? Name three costs that could be addressed, and rationalize your response.
- What parts of the value chain might be negatively impacted by White's decision in the current period? How will this impact the company in the future? Name three ways the company may be impacted by the decision to cut cost.