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		1,190		$	169	per order
Warehousing	Number of moves		8,800			38	per move
Distributing	Number of shipments		690			99	per shipment

Caldwell buys 101,900 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 $251,900 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 870 and can decrease the cost of each shipment by $22 with minor changes in its operations. Any further cost savings must come from re-engineering 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