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: Quantity of Cost Cost per Unit of Cost Driver $158 per order 38 per move 88 per shipment Activity Purchasing Warehous ing Distributing Cost Driver Number of purchase orders Number of moves Number of shipments Driver 1,080 8,800 580 Caldwell buys 100,800 units at an average unit cost of $18 and sells them at an average unit price of $28. The firm also has fixed operating costs of $250,800 for the year. Caldwell's customers are demanding a 18% 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 12% discount. Required: Caldwell has estimated that it can reduce the number of purchase orders to 760 and can decrease the cost of each shipment by $11 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

Particulars	Amount ($)	Amount ($)
Sales (100,800*$28)		2822400
Less: Operating costs
Variable costs (100,800*$18)	1814400
Fixed costs	250800
Total operating costs		2065200
Gross profit		757200
Less: Overheads
Purchasing (1080*158)	170640
Warehousing (8800*$38)	334400
Distributing (580*$88)	51040
Total overheads		556080
Current Net income		201120
New selling price = $28-18%=22.96
New variable operating cost = $18-12% = $15.84
New purchase orders = 760
New distributing cost = $88-$11 = $77
Particulars	Amount ($)	Amount ($)
Sales (100,800*$22.96)		2314368
Less: Operating costs
Variable costs (100,800*$15.84)	1596672
Fixed costs	250800
Total operating costs		1847472
Gross profit		466896
Less: Overheads
Purchasing (760*158)	120080
Warehousing	-
Distributing (580*$77)	44660
Total overheads		164740
Net income		302156
Less: Current net income		201120
Target warehousing cost		101036