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		1,020		$	152	per order
Warehousing	Number of moves		8,200			32	per move
Distributing	Number of shipments		520			82	per shipment

Caldwell buys 100,200 units at an average unit cost of $12 and sells them at an average unit price of $22. The firm also has fixed operating costs of $250,200 for the year.

Caldwell’s customers are demanding a 12% 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 5% discount.

Required:
Caldwell has estimated that it can reduce the number of purchase orders to 700 and can decrease the cost of each shipment by $5 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