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		1,140		$	164	per order
Warehousing	Number of moves		8,300			33	per move
Distributing	Number of shipments		640			94	per shipment

Caldwell buys 101,400 units at an average unit cost of $13 and sells them at an average unit price of $23. The firm also has fixed operating costs of $251,400 for the year.

Caldwell’s customers are demanding a 13% 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 6% discount.

Required:
Caldwell has estimated that it can reduce the number of purchase orders to 820 and can decrease the cost of each shipment by $17 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

Solution :

Profit for Last-Year :

• Sales ( 1,01,400 * 23 ) = 23,32,200
• Less :Purchase cost = $11,66,100
• Gross margin = $11,66,100
• Less : cost of purchasing ( 1,140 * 164 ) = $1,86,960
• Warehousing ( 8,300 * 33 ) = $2,73,900
• Distributing ( 640 * 94 ) = 60,160
• Fixed Operating Cost = $2,51,400

Net Profit ( Gross marigin - Total expenses ) = ( 11,66,100 - 7,72,420 ) = $3,93,680

Profit for This-Year :

• Desired Profit = $3,93,680
• Add : Fixed Costs = 2,51,400
• Purchase cost ( 820 * 17 ) = 13,940
• Distribution cost ( 640 * ( 94 - 17 ) ) = ( 640 * 77 ) = 49,280

Total ( 3,93,680 + 2,51,400 + 13,940+ 49,280 ) = $7,08,300

Gross Margin :

• ​​​​​​​Sales ( 1,01,400 * 21 ) = $21,29,400
• Less : Purchase Cost ( 1,01,400 * 12.8 ) = $12.97.920

Gross Margin ( 21,29,400 - 12,97,920 ) = $8,31,480

i.e Target Cost for Warehousing = $8,31,480 - $7,08,300 =  $1,23,180

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