Question

BookWeb, Inc., sells books and software over the Internet. A recent article in a trade journal has caught the attention of management because the company has experienced soaring inventory handling costs. The article notes that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales. Thirteen percent is attractive to BookWeb management when compared to its results for the past year, shown in the following table.

How much additional cost cutting is needed to achieve the target percentages?

BookWeb, Inc., sells books and software over the Internet. A recent article in a trade journal has caught the attention of management because the company has experienced soaring inventory handling costs. The article notes that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales. Thirteen percent is attractive to BookWeb management when compared to its results for the past year, shown in the following table. Cost Driver Quantity % of Cost Driver for Books % of Cost Driver for Software 2,000 70% Activity (cost) Incoming receipts ($300,000) Warehousing ($360,000) Shipments ($225,000) Cost Driver Number of purchase orders Number of inventory moves Number of shipments 9,000 15,000 Book sales revenue totaled $3,900,000 and software sales revenue totaled $2,600,000. A review of the company's activities found various inefficiencies with respect to the warehousing of books and the outgoing shipments of software. In particular, book misplacements resulted in an extra 550 moves and software had 250 incorrect shipments. e-1. Do either of the product lines require additional cost cutting to achieve the target percentages? e-2. How much additional cost cutting is needed to achieve the target percentages? Complete this question by entering your answers in the tabs below. Req E1 Req E2 How much additional cost cutting is needed to achieve the target percentages? Additional cost cutting

Answer 1

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Book Web Inc.
Calculation of ABC rates for overhead		A					B	C=A/B
Activity	Cost Driver	Cost					Total	ABC rates
Incoming Receipts	Number of purchase orders	300,000.00					2,000.00	150.00
Warehousing	Number of inventory moves	360,000.00					9,000.00	40.00
Shipments	Number of shipments	225,000.00					15,000.00	15.00
Total Cost assigned		885,000.00
Allocation table
Books		See C					See B	D	E=B*D	F=C*E
Activity cost pool	Activity Measure	ABC Rates					Total	% used	Activity used	Cost assigned
Incoming Receipts	Number of purchase orders	150.00					2,000.00	70%	1,400.00	210,000.00
Warehousing	Number of inventory moves	40.00					9,000.00	80%	7,200.00	288,000.00
Shipments	Number of shipments	15.00					15,000.00	25%	3,750.00	56,250.00
Total Cost assigned										554,250.00
Product B		See C					See B	G	H=B*G	I=C*H
Activity cost pool	Activity Measure	ABC Rates					Total	% used	Activity used	Cost assigned
Incoming Receipts	Number of purchase orders	150.00					2,000.00	30%	600.00	90,000.00
Warehousing	Number of inventory moves	40.00					9,000.00	20%	1,800.00	72,000.00
Shipments	Number of shipments	15.00					15,000.00	75%	11,250.00	168,750.00
Total Cost assigned										330,750.00
		Existing inventory handling cost as a % of revenue:
		Books= 554,250/3,900,000=		14.21%
		Software= 303,750/2,600,000=		12.72%
		Answer e -1
		Inventory handling cost as % of sales revenue for software product line is with in target. However, stock handling costs of books require additional cost reductions to achieve the target percentage.
		Answer e -2			Amount $
		Existing inventory handling cost of books product line			554,250.00
		Less: Target cost of book product line =		$3,900,000 * 13%	507,000.00
		Additional cost cutting needed to achieve target percentages			47,250.00