Question

BookWeb, Inc., sells books and software over the Internet. A recent article in a trade journal has caught the attention of management because the company has experienced soaring inventory handling costs. The article notes that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales. Thirteen percent is attractive to BookWeb management when compared to its results for the past year, shown in the following table.

Activity (cost)	Cost Driver	Cost Driver Quantity				% of Cost Driver for Books				% of Cost Driver for Software
Incoming receipts ($300,000)	Number of purchase orders		2,000				70	%			30	%
Warehousing ($360,000)	Number of inventory moves		9,000				80				20
Shipments ($225,000)	Number of shipments		15,000				25				75

Book sales revenue totaled $3,900,000 and software sales revenue totaled $2,600,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of books and the outgoing shipments of software. In particular, book misplacements resulted in an extra 550 moves and software had 250 incorrect shipments.

Problem 19.7A Part e

e-1. Do either of the product lines require additional cost cutting to achieve the target percentages?

e-2. How much additional cost cutting is needed to achieve the target percentages?

Answer 1