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

The CFO is thinking about cutting down warranty costs. The principal decision is to decrease warranty rate to zero while the option is to cut the assessed warranty liability percent to 25% of its present-day esteem. Both these alternatives, whenever authorized may be effectively in cutting charges, the principal decision would achieve reducing additional expenses than the second. Nonetheless, the main option could have a lot of downsides, whenever managed inappropriately, the organization might need to lose business endeavour and income, and it may come to be in purchaser dis-delight and loss of goodwill for the business. The business may develop as losing a few customers who could never again be set up to look for the item if no guarantees are being given by methods for the makers, and they may go for competitors’ products in the event that they accompany warranties. Subsequently, in the event that I had been the CFO on this case, in order to avoid the situation characterized above, I would portion out the confirmation costs in a bit by bit way by methods for venturing into for the subsequent other option, in inclination to putting off the costs inside and out according to the main other option.

The business endeavour can cut warranty cost and liabilities by modifying terms and conditions to make them extra ideal from a cost-trouble point of view. They can likewise format and designer better items, in this manner diminishing item reliability and viability costs. With better satisfactory product, warranty cost can be reduced as well as customer confident and goodwill can also be developed.