Discuss real examples of cost increases for fixed costs (at least 2) and decreases for direct...

Discuss real examples of cost increases for fixed costs (at least 2) and decreases for direct materials (at least 2) that could be implemented for this business. Can the company increase price? What other areas might be impacted due to the price increase? You are the CFO of this business what is important to consider? Give 2 industry specific details that can impact this discussion. (CABINET INDUSTRY)

Expert Solution

Cabinets & their sought-after varieties define the style- preferences of the home-maker & hence this has become a flourishing industry ,providing livelihood to many people , who specialise in the art of making general-purpose or custom-created cabinets.

Various types of cabinets for use in kitchen, drawing,dining, baths ,lawns & office are aplenty in the market.So,it depends on the functionl purpose of the buyer.

That said, the manufacturer incurs various costs such as materials, labor & other overhead costs ,along with,which he adds his profit margin ,to price the cabinet.

To this end, he/she incurs some fixed & some variable /flexible costs while running this business.

Some examples of fixed cost increases are increase in salary commitments , due to recruitment of new personnel , additional expense towards insurance on new acquisitions such as buildings, equipments to manufacture,& also subsequent enhanced depreciation on these assets, rent & similar expenses as the business expands.

Direct Materials used in this industry is mainly different types of wood,plywood, pulls, handles,glass,paints/varnish and the like.

Decrease in the above costs is possible ,if ordered & bought in bulk, enabling bulk discounts on mass & ensured future purchases--from the same/group of vendors.

Another area of decrease in direct material costs may to be reduce expenses towards freight-in, by relocating factory nearer to main suppliers --which may be cost-saving in the long-run.

Increasing the selling price has to consider the following before resorting to the same:

1. be able to justify on account of any of the ingredient's price-rise, like materilas, labor, design, etc.

2. has to compare with peers in the same trade.

3.Possibility of losing the existing customers to competitors.

4. Consequent lower demand leading to lesser sales volume, that the company may find it difficult to cover its costs.

The CEO /CFO must consider the facts that isolated -price increase ,without proper justifications,may have an impact on demand/sales volume & customer preferences.

ekkarill92 answered 1 year ago

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