Question

A new CFO at Hanson Technologies is tasked with the responsibility of analyzing costs in an effort to reduce them in preparation for expansion into the global markets. Much of the cost cutting so far has been from finding lower cost suppliers for much of the materials, reducing machine maintenance schedules, and hiring contract labor to reduce benefits to longer term employees. The CFO has now been looking for additional cost cutting strategies and has identified warranty expense as one of the costs that needs to be cut. He is considering two proposals to do so. The first is to cut out warranties on their product altogether to reduce the warranty expense to zero. The other is to cut the estimated warranty liability percentage down to 25% of its current value. Discuss whether either of these options will work for this purpose. What are your thoughts on which, if either, option should be enacted? What would you do if you were the CFO in this case?

Answer 1

As per the best my knowledge and experience i should prefer second option that is to cut down the warranty cost at 25%. If company select option 1 which is to cut out warranty altogether to reduce warranty cost at zero then its create negative impression on customer's mind and becuase of that ut may possible that customer will find some another supplier where they get warranty and becuase of that hanson technologies will lost their customers and so it's revenue will decrease.

If i am CEO of the company i will do analysis of warranty claims received during last 5 years and how much warranty cost is incurred by company every year for each warranty claim received and also calculate the time period within which company get warranty claim i.e. within 30 days or within 40 days .... After doing above analysis comapny can make provision on the basis of expected warranty claim.

In above proposal company can also reduce the time period within which company will except claim i.e. 30 days or 45 days or 60 days as per analysis and also create warranty cost slab for each different period like 95% if claim received within 15 days, 75% if received after 15th day but before 30th day....