Question

Could you explain the steps in detail?

Thanks.

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		1,200		$	170	per order
Warehousing	Number of moves		8,900			39	per move
Distributing	Number of shipments		700			100	per shipment

Caldwell buys 102,000 units at an average unit cost of $19 and sells them at an average unit price of $29. The firm also has fixed operating costs of $252,000 for the year.

Caldwell’s customers are demanding a 19% 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 13% discount.

Required:
Caldwell has estimated that it can reduce the number of purchase orders to 880 and can decrease the cost of each shipment by $23 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

Current year operating income
Sales (102000*29)		2,958,000
Less: Operating cost
Purchase (102000*19)	1,938,000
Purchasing order (1200*170)	204,000
Warehousing (8900*39)	347,100
Distributing (700*100)	70,000
Fixed operating cost	252,000
Total operating cost		2,811,100
Net operating profit		146,900

Selling Price per unit (29-(29*19%))		$               23.49
Purchase price per unit (19-(19*13%))		$               16.53
Number of unit sold for maintain same amount of sell (2958000/23.49)		125,925.9259
Target warehousing cost
Sales		2,958,000
Purchase (125925.9259*16.53)	2,081,556
Purchasing order (880*170)	149,600
Distributing (700*(100-23))	53,900
Fixed operating cost	252,000
Total cost exclude Warehousing		2,537,056
Net operating income before warehouse cost		420,944
Less: Desired Net operating profit		146,900
Target warehousing cost		274,044
We know that unit cannot be in fraction, but we consider in fraction for show proof of answer.

Next year operating income (Proof of answer)
Sales (125925.9259*23.49)		2,958,000
Less: Operating cost
Purchase ((125925.9259*16.53)	2,081,556
Purchasing order (880*170)	149600
Warehousing	274,044
Distributing (700*(100-23))	53,900
Fixed operating cost	252,000
Total operating cost		2,811,100
Net operating profit		146,900