Question

Deco Tiles is a small distributor of marble tiles. Deco identifies its three major activities and cost pools as​ ordering, receiving and​ storage, and​ shipping, and it reports the following details for 2013

For 2013​, Deco buys 270,000 marble tiles at an average cost of $3 per tile and sells them to retailers at an average price of $7 per tile. Assume Deco has no fixed costs and no inventories.

			Quantity of	Cost per Unit
Activity		Cost Driver	Cost Driver	of Cost Driver
1.	Placing and paying for orders of marble tiles	Number of orders	400	$90 per order
2.	Receiving and storage	Loads moved	4,400	$40 per load
3.	Shipping of marble tiles to retailers	Number of shipments	1,600	$50 per shipment

1.	Calculate Deco​'s operating income for 2013.
2.	For 2014​, retailers are demanding a 44​% discount off the 2013 price. Deco​'s suppliers are only willing to give a 33​% discount. Deco expects to sell the same quantity of marble tiles in 2014 as in 2013. If all other costs and​ cost-driver information remain the​ same, calculate Deco​'s operating income for 2014.
3.	Suppose further that Deco decides to make changes in its ordering and​ receiving-and-storing practices. By placing​ long-run orders with its key​ suppliers, Deco expects to reduce the number of orders to 100 and the cost per order to $45 per order. By redesigning the layout of the warehouse and reconfiguring the crates in which the marble tiles are​ moved, Deco expects to reduce the number of loads moved to 3,525 and the cost per load moved to $38. Will Deco achieve its target operating income of $2.89 per tile in 2014​? Show your calculations.

Answer 1

(1).

	Total (270000 tiles)	Per tile
Revenue (270000 * $7)	$1890000	$7
Purchase cost (270000 * $3)	$810000	$3
Order cost (400 * $90)	$36000	$0.13
Storage cost (4400 * $40)	$176000	$0.65
Shipping cost (1600 * $50)	$80000	$0.30
Total costs	$1102000	$4.08
Operating income	$788000	$2.92

Note:

All per tile calculation are done approximately to 2 decimal point.

(2).

	Total (270000 tiles)	Per tile
Revenue (270000 * $3.92)	$1058400	$3.92
Purchase cost (270000 * $2.01)	$542700	$2.01
Order cost (400 * $90)	$36000	$0.13
Storage cost (4400 * $40)	$176000	$0.65
Shipping cost (1600 * $50)	$80000	$0.30
Total costs	$834700	$3.09
Operating income	$223700	$0.83

Note:

All per tile calculation are done approximately to 2 decimal point.

(3).

	Total (270000 tiles)	Per tile
Revenue (270000 * $3.92)	$1058400	$3.92
Purchase cost (270000 * $2.01)	$542700	$2.01
Order cost (100 * $45)	$4500	$0.017
Storage cost (3525 * $38)	$133950	$0.50
Shipping cost (1600 * $50)	$80000	$0.30
Total costs	$761150	$2.82
Operating income	$297250	$1.10

On the basis of per unit calculation, it is clear that Deco Tiles will generate $1.10 per tile profit. So Deco will not achieve its target operating income of $2.89 per tile in 2014​.

Note:

All per tile calculation are done approximately to 2 decimal point.