Warranty Cost as Present of Return

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For many companies the Warranty Cost As Present of Return represents the single most important driver of their overall manufacturing costs. A company's ability to successfully manage its inventory, its production and its shipping and receiving capabilities allows the company to effectively control its Cost Aspects. The ability to manage the products in inventory, including those in the "on hand" and "out of stock" positions allows the company to re-order product when it is necessary, which in turn, also allows the company to effectively control its inventory levels. These factors all cumulatively reduce the cost of manufacturing the inventory that determines a company's gross margin and net profit margin.

In considering the Warranty Cost As Present of Return for a given Company, several key drivers are of primary interest. One is the actual cost of producing a new unit versus the cost of ordering a new unit. If a Company is able to re-order its product at a lower cost than the cost of producing an equivalent new unit then it has the ability to realize its cost savings from this approach. The second driver relates to the actual manufacturing cost versus the cost of importer financing that support the importation of the product into the country in question. This financing may be provided either directly or through a host recipient and if the product has already been shipped the impact of this fact on the Company's gross margin and net profit will also need to be considered.

The third driver is the effect of changes in inventory asset quantity. If the net stock level of a Company's product inventory is reduced due to inventory purchases that exceed net stock available, then this could result in a reallocation of the Inventory Cost As Present of Return to other costs such as production and shipping. Changes in production costs can also have a substantial effect on the gross margin and net profit of a Company since increased production normally will drive down the cost of production. Other factors that can have a direct impact on the Company's gross margin and net profit include the timing and degree of investments in new products, the depth of marketing communications and the methods used to maintain a good working capital management profile.

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