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Basic
Sophisticated
Control panel
Engine
65
45
-
Alternator
20
15
-
Radiator
10
5
-
Control panel
-
20
70
Electronics
-
10
30
Base
5
5
-
The company could invest in a computer controlled numeric lathe, which could produce
the wide variety of control panels required by customers. It would cost around £100,000,
with an anticipated production life of 6 years. This would halve the production cost of the
control panel as well as significantly reducing - by about 65 per cent - the inventory of
basic materials (around £25,000) that the company needed to hold. This equipment was
available on a 3 year lease at £43,000 per annum.
Once the generator system had been built and tested on site. Further tests were often
carried out on on the customer's premises. These extra costs would be negotiated at the
contract completion stage. Historically, the company always had problems with payments,
documentation, delivery to ports and so on. These were a major cause of the high level of
stocks and debtors.
Two secretarial staff kept track of all the components, correspondence with current
customers and potential clients, and the mailing list. They cost £10,000 per annum and
used manual typewriters and card indexes for correspondence. The introduction of a
computer, which could handle all the correspondence and the mailing list would make it
possible to employ only one secretary. The cost of the computer and associated software
was £2000 to buy, or £55 a week to lease. The existing staff had no computer experience,
and would be entitled to a minimum of £1500 severance pay each. Computer training
would mean around 30 days at £120 per day.
The two accounts staff were also employed at a total cost of £12,000 per annum. At
present, Herbert Engineering used a manual accounts and order processing system. A
computerised system could be introduced at a cost of £1500, which would include all
software and training for the one member of staff that would then be required. As neither
of the accounts staff had been employed for long, no severance pay would be required.
The cleaning staff cost £5000 per annum and the security guard £10,000. Subcontracting
both services was possible and would reduce the cost by 50 per cent.
Promotion and salesforce
The company currently used direct mail for the majority of its promotional investment,
while relying on directories for much of the low cost export work. It also traditionally took
part in three of the major power exhibitions. The managing director carried out all the
sales contact, though the company used sales agencies to support the three exhibitions
that the company normally used.
The existing budget
Management at Herbert had split the business into revenue and cost centres to provide a
base for future analysis. They had broken down the revenue centres by geography,
customer type, and product line, and had separated out a wide range of cost centres
(Table 11G).
Table 11G. Revenue £'000 for Herbert Engineering by year with year 4 the most recent
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