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 1,130 $ 163 per order Warehousing Number of moves 8,200 32 per move Distributing Number of shipments 630 93 per shipment Caldwell buys 101,300 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 $251,300 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 4% discount. Required: Caldwell has estimated that it can reduce the number of purchase orders to 810 and can decrease the cost of each shipment by $16 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

1.) Computation of Profit for the year just completed

Revenue (22-12)*101300	1013000
Less: Purchase cost (1130*163)	184190
Less: Warehousing cost (8200*32)	262400
Less: Distributing cost (630*93)	58590
Less: Fixed Costs	251300
Net Profit	256520

2.) Computation of Target cost for warehousing

Revenue (19.36-11.52)*101300	794192
Less: Purchase cost (810*163)	132030
Less: Distribution cost (630*77)	48510
Less: Fixed cost	251300
Less: Desired Profit (as computed above)	256520
Warehousing cost	105832

The maximum (target cost) for warehousing if the firm decides to earn the same amount of profit next year, should be $ 105832, which can be achieved by either reducing the number of moves or the cost per move.

Working Notes:

• Sale Price 22 less 12% discount = $ 19.36
• Cost Price 12 less 4% discount = $ 11.52