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 considering cutting warranty costs . The first option is to reduce warranty expense to zero while the other is to cut the estimated warranty liability percentage to 25% of its current value. Both these options, if enacted would work in cutting costs successfully, the first option would result in cutting more costs than the second. However, the first option would have its share of drawbacks, if handled improperly, the company could lose business and revenue, and it might end up in customer dis-satisfaction and loss of goodwill for the company. The company might end up losing some customers who would not be prepared to buy the product if no warranties are being provided by the manufacturers, and they might prefer the competitors products if they come with warranties. Hence, if I were the CFO in this case, in order to avoid the situation described above, I would phase out the warranty costs in a step-by-step manner by going in for the second option, rather than eliminating the costs altogether as per the first option.

The company can reduce warranty expense and liabilities by adjusting terms and conditions to make them more favorable from a cost-burden perspective. They can also design and engineer better products, thus reducing product reliability and maintainability costs. With better quality products, not only are warranty return costs slashed, but customer confidence and goodwill are built.