Accounting For Liabilities
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?