Target Cost; Warehousing McFee 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 purchasing orders | 1,000 | $150 per order |
Warehousing | Number of moves | 8,000 | 30 per move |
Distributing | Number of shipments | 500 | 80 per shipment |
McFee buys 100,000 units at an average unit cost of $10 and sells them at an average unit price of $20. The firm also has a fixed operating cost of $250,000 for the year.
McFee’s customers are demanding a 10 percent discount for the coming year. The company expects to sell the same amount if the demand for price reduction can be met. McFee’s suppliers, however, are willing to give only a 2 percent discount.
Required McFee has estimated that it can reduce the number of purchasing orders to 700 and can decrease the cost of each shipment $5 with minor changes in its operations. Any further cost saving 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?
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