Question

The manager is reviewing a list of expenses for the operation of her establishment. She notices several increases in costs compared to the previous month.  These are the items that have increased in cost:

1. Electricity
2. Labor
3. Food cost

a- What can the manager do to reduce these costs in the upcoming months?  

b- Are there any costs that she cannot reduce?

c- Which of the costs are semi variable and how can she control the variable portion of those costs?

d- What can she do to increase profits even if she is not able to cut costs?

Answer 1

Solution –

1. The manager can bring down the costs in the following ways –

Electricity – This cost can be brought down through awareness among the staff members to become more sensitive towards lights which are burning idle (i.e. without any requirement). Usage of sensors will also bring down electrical expenses.

Labor – The costs on labor can be brought down by acquiring a mix of staff which is young and experienced. The young staff can be paid at another level while the older staff can be paid at an increased level to compensate the experience. This will not hamper the business and also bring down the average costs.

Food Costs – This is actually a way to keep the employees motivated. One can spread awareness that food should not be wasted but not many options are available to reduce food costs. Switching on quality can lead to low motivation among employees.

2. Costs on electricity and labor can be reduced but the cost on food is a difficult candidate and cannot be reduced much as this is more of a motivating factor.
3. Costs on Electricity and Labor (If a fixed and variable pay option are involved) are semi-variable costs. The variable parts can be controlled in the following ways –

Electricity Costs – Application of sensors to reduce unnecessary burning of lights. Spreading awareness to sensitize the staff on saving electricity.

Labor Costs – A through appraisal to understand who should be paid how much of the variable pay for performance.

4. The best way to increase profits if one is unable to reduce costs is through –

1. Increase in sales/revenue
2. Increase in productivity per employee by keeping the employees motivated
3. Playing a price strategy to increase profits