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Analysis of cost implications cost saving strategy
Course:- Operation Management
Reference No.:- EM131124456




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World Measurement is the global leader in product testing for safety. The recent problem with Chinese-made toy products (for example, Mattel recalled 19 million toys with evidence of lead paint) combined with the global recession has caused a 7% decline in sales and 12% in net profits. The president of the company, Lewis Jacobs, is convinced that he must get concessions from the workers if World Measurement is to compete effectively with increasing foreign competition. In particular, Jacobs is displeased with the cost of employee benefits. He doesn't mind conceding a competitive wage increase (maximum 3%), but he wants the total compensation package to cost 3% less. The current costs are shown in Exhibit 1 (attached). Your assistant has surveyed other companies that are obtaining concessions from employees. You also have data from a consulting firm that indicates employee preferences for different forms of benefits (see Exhibit 2 attached). Based on all this information, you have two possible concession packages that you can propose, labeled "Option 1" and "Option 2" (see Exhibit 3 attached). Please analyze and answer each of the questions below. It is not necessary for you to type the question itself. Your assignment should be 3-4 pages long, double-spaced, using 12-point font, excluding cover page, attachments, etc. 1. Cost out these packages given the data in Exhibit 1 and the information obtained from various insurance carriers and other information sources (see Exhibit 4 attached). 2. Which package should you recommend to Jacobs? Why? 3. Which of these strategies do you think will require less input from employees in terms of their reactions? Why? Exhibit 1: Current Compensation Costs Average yearly wage $27,290.00 Average hourly wage 13.12 Dollar value of yearly benefits, per employee 16,904.00 Total compensation (wages plus benefits) $44,194.00 Benefits (by Category) Dollar Cost/Employee/Year 1. Legally required payments (employer’s share): a. FICA taxes $2,088.00 b. Unemployment compensation 434.00 c. Workers’ compensation 546.00 2. Pension, insurance, etc. (employer’s share): a. Pension plan premiums/pension payments 1,460.00 b. Life insurance and health insurance 427.00 c. Health insurance 4,000.00 c. Short-term disability 83.00 d. Salary continuation/long-term disability 57.00 e. Dental insurance 350.00 f. Discounts on goods/services purchased from company by employees 27.00 g. Miscellaneous payments (separation or termination pay moving expenses, etc.) 124.00 3. Paid rest periods, lunch periods, wash-up time, clothes- change time, get ready time, etc. (60 minutes/day) 3410.00 4. Payments for time not worked: a. Paid vacations/payments in lieu of vacation (16 days per year average) 1,680.00 b. Payments for holidays not worked (9 days) 945.00 c. Paid sick leave (10 days maximum) 1050.00 d. Payments for state or national guard duty, jury duty, bereavement pay, voting pay allowance 66.00 5. Other items: a. Profit sharing payments 0.00 b. Contributions to employee thrift plans 71.00 c. Christmas or other special bonuses, service awards, suggestion awards, etc. 0.00 d. Employee education expenditures (tuition reimbursement, etc.) 40.00 e. Special wage payments ordered by courts, payments to union stewards, etc. 46.00 Total $16,904.00 Exhibit 2: Benefit Preferences Benefit Type/Method of Administration Importance to Workers Pensions 87 Health insurance 86 Life insurance 79 Paid vacation 82 Holidays 82 Long-term disability 72 Paid sick leave 70 Short-term disability 69 Paid rest periods, lunch periods, etc. 55 Dental insurance 51 Christmas bonuses 31 Profit sharing 21 Education expenditures 15 Contributions to thrift plans 15 Discount on goods 5 Fair treatment in administration 100 Note: 0 = unimportant; 100 = extremely important Option 1: Implement copay for benefits: Pension plan ($25.00 per month) Life insurance premium ($10.00 per month) Health insurance premiums ($50.00 per month) Dental insurance ($10.00 per month) Short-term and long-term disability insurance ($7.50 per month) Reduction of Benefits Eliminate 10-minute paid break (workers leave work 10 minutes earlier) Eliminate one paid holiday per year Eliminate two sick days per year Option 2: Improved claims processing: Unemployment compensation Workers’ compensation Short- and long-term disability insurance Increase deductible from $500 to $1,000 on health insurance Implement probationary periods: 6 months’ probationary period on health insurance 1 year probationary period on dental insurance Implement probationary period of 1 year on dental insurance Implement copay for benefits: Health insurance - $50.00 per month Dental insurance - $10.00 per month Life insurance - $10.00 per month Short- and long-term disability insurance - $5.00 per month Reduction of benefits: Eliminate payments to thrift plan Eliminate two paid holidays per year Eliminate tuition reimbursement Exhibit 4: Analysis of Cost Implications Cost Saving Strategy: Copay Dollar-for-dollar savings equal to amount of copay Deductible: Health insurance – 15% savings of benefit cost Required probationary periods: Health insurance – 5% savings of benefit cost Dental insurance – 10% savings of benefit cost Improved claims processing: Unemployment compensation – 8% of benefit cost Workers’ compensation – 3% of benefit cost Short-term and long-term disability – 1% of benefit cost.




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