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	Cost Driver	Quantity of Cost Driver			Cost per Unit of Cost Driver
Purchasing	Number of purchase orders		1,080		$	158	per order
Warehousing	Number of moves		8,800			38	per move
Distributing	Number of shipments		580			88	per shipment

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?

Answer 1

ANSWER

Calculation of current income

Particulars	Amount($)	Amount($)
Sale[100,800 units *28]		2,822,400
Less:- Operating costs:-
Variable costs[100,800 units *18	1,814,400
Fixed Costs	250,800
Total Operating Cost		(2,065,200)
		757,200
Less :_ Overheads
Purchasing [1,080 order *158]	170,640
ware housing [8,800*38]	334,400
Distributing[580* 88]	51,040
Total overhead		(556,080)
Net Income		$201,120
Now calculate Revised Price	Selling	Buying
Current price	28	18
Less:-Discount[28*18%][18*12%]	5.04	2.16
Revised price	22.96	15.84

Calculate net income as per Estimations

Income statement
Particulars	amount($)	amount($)
sale [100,800 *22.96]		2,314,368
Less:-Operating costs[100,800 *15.84]	1,596,672
Fixed cost	250,800
Total operating costs		(1,847,472)
Gross Profit		466,896
Less:- Overhead:-
Purchasing [760 *158]	120,080
warehousing	-
Distributing[580 *77](88-11)	44,660
Total Overhead		(164,740)
Net income		302,156
Current net income		(201,120)
Target warehousing cost		$101,036

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