Question

Caldwell Supply, a wholesaler, has determined that its operations have three primary activities: purchasing, warehousing, and distributing. The firm reports the following operating data for the year just completed: Activity Purchasing Warehousing Distributing Cost Driver Number of purchase orders Number of moves Number of shipments Quantity of Cost Driver 1,150 8,400 650 Cost per Unit of Cost Driver $165 per order 34 per move 95 per shipment Caldwell buys 101,500 units at an average unit cost of $14 and sells them at an average unit price of $24. The firm also has fixed operating costs of $251,500 for the year. Caldwell's customers are demanding a 14% discount for the coming year. The company expects to sell the same amount if the demand for price reduction can be met. Caldwell's suppliers, however, are willing to give only a 7% discount. Required: Caldwell has estimated that it can reduce the number of purchase orders to 830 and can decrease the cost of each shipment by $18 with minor changes in its operations. Any further cost savings must come from reengineering the warehousing processes. What is the maximum cost (i.e., target cost) for warehousing if the firm desires to earn the same amount of profit next year? Maximum cost

Answer 1

CURRENT YEAR Amounts 24,36,000.00 24*101500 No. of Units sold : 101,500 Particulars Sales Less: Variable Costs Purchase cost Cost of Purchase orders Warehousing Cost Distribution Cost 14101500 1150*165 per order 8400*34 per move 650*95 shipments 14,21,000.00 1,89,750.00 2,85,600.00 61,750.00 | 19,58,100.00 Less : Fixed Operating Cost 2,51,500.00 2,26,400.00 Current Year Profit NEXT YEAR (24*0.86)*101500 20,94,960.00 Sales Less: Variable Costs Purchase cost Cost of Purchase orders Distribution Cost (14*0.93)*101500 830* 165 per order 650*77 shipments 13,21,530.00 1,36,950.00 50,050.00 15,08,530.00 Less : Fixed Operating Cost 2,51,500.00 Profit before warehousing cost 3,34,930.00 Desired Profit| 2,26,400.00 Target Warehousing cost 1,08,530.00