Question

Lightening Bulk Company is a moving company specializing in transporting large items worldwide. The firm has an 78% on-time delivery rate. Thirty percent of the items are misplaced and the remaining 3% are lost in shipping. On average, the firm incurs an additional $58 per item to track down and deliver misplaced items. Lost items cost the firm about $230 per item. Last year, the firm shipped 5,930 items with an average freight bill of $130 per item shipped.

The firm’s manager is considering investing in a new scheduling and tracking system costing $145,000 per year. The new system is expected to reduce misplaced items to 18% and lost items to 0.75%. Furthermore, the firm expects total sales to increase by 27% with the improved service. The average contribution margin ratio on any increased sales volume, after cost savings associated with a reduction in misplaced and lost items, is expected to be 30.5%.

Required:

1a. Based on a relevant cost analysis, should the firm install the new tracking system?

• Yes

• No

1b. What is the estimated change in pretax cash flow under the proposed system? (Negative amounts should be indicated by a minus sign. Round your answers to the nearest whole dollar amount.)

	Cost of the new system (per year) Expected benefits each year from the new system: Contribution margin from sales increase Cost savings from decrease in misplaced items—existing sales Savings from decrease in lost items—existing sales $0 Change in pre-tax cash flow per year under the new system

2. Upon further investigation, the manager discovered that 73% of the misplaced or lost items either originated in or were delivered to the same country. What is the maximum amount the firm should spend to reduce the cost of problems in that country by 83%? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

	Maximum amount to pay for process improvements

Answer 1

Part 1a) and 1b)

The estimated change in pretax cash flow under the proposed system is calculated as below:

Lightening Bulk Company
Cost and Benefit Analysis of the Proposed Scheduling and Tracking System
Cost of the new system (per year)		145,000
Expected benefits each year from the new system:
Contribution margin from sales increase (5,930*27%*130*30.5%)	63,484
Savings from decrease in misplaced items [5,930*(30% - 18%)*58]	41,273
Savings from decrease in lost items [5,930*(3% - .75%)*230]	30,688	135,444
Change in pre-tax cash flow per year		-$9,556

No, the firm shouldn't install the new tracking system as it results in a negative change in pre-tax cash flow per year.

______

Part 2)

The maximum amount for process improvements is arrived as below:

Cost of misplaced items (5,930*30%*73%*58)	75,323
Cost of lost items (5,930*3%*73%*230)	29,869
Total cost of lost and misplaced items (A)	105,192
Targeted reduction in total cost (B)	83%
Maximum amount for process improvements (A*B)	$87,310