Orange Electronics has been experiencing declining profit margins and has been looking for ways to increase operating income. It cannot raise selling prices for fear of losing business to its competitors. It must either cut costs or improve productivity.
The company uses a standard cost system to evaluate the performance of the soldering department. It investigates all unfavorable variances at the end of the month. The soldering department rarely completes the operations in less time than the standard allows (which would result in a favorable variance). In most months, the variance is zero or slightly unfavorable. Reasoning that the application of lower standard costs to the products manufactured will result in improved profit margins, the production manager has recommended that all standard times for soldering operations be drastically reduced. The production manager has informed the soldering personnel that she expects the soldering department to meet these new standards.
Required
Will the lowering of the standard costs (by reducing the time of the soldering operations) result in improved profit margins and increased productivity? Explain.