Question

Celine Inc. is a small distributor of drawing pencils. Celine identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2020 :

Activity	Cost Driver	Quantity of Cost Driver	Cost per unit of cost driver
Placing and playing for orders of   drawing pencil   packs	Number of orders	600	$150
Receiving and   storage	Loads movement	5000	$40
Shipping	Number of   shipments	2000	$100

 

For 2020, Celine buys 200,000 pencil packs at an average cost of $10 per pack and sells them to retailers at an average price of $15 per pack. Assume Celine has no fixed costs and no inventories. For 2021, retailers are demanding a 5% discount off the 2020 price. Celine suppliers are only willing to give a 3% discount. Celine expects to sell the same quantity of pencil packs in 2021 as it did in 2020.

Using value engineering, Celine decides to make changes in its ordering and receiving-and storing practices. By placing long-run orders with its key suppliers, Celine expects to reduce the number of orders to 500 and the cost per order to $50. By redesigning the layout of the warehouse and reconfiguring the crates in which the pencil packs are moved, Celine expects to reduce the number of loads moved to 4000 and the cost per load moved to $30.

Will Celine achieve its target operating income of $90,000 and its target operating in- come per unit of $0.36 per pencil pack in 2021? Show your calculation

Answer 1

	Income Statement	3% Discount		5% Discount
	Sales Revenue	$2,910,000	(200,000x15)x97%	$2,850,000	(200,000x15)x95%
Less:	Cost of Purchase	$2,000,000		$2,000,000
Less:	Overhead Cost
	Ordering Cost	$20,000	(400*50)	$20,000
	Receiving and Storage	$120,000	(4,000*30)	$120,000
	Shipping	$200,000	(2,000X100)	$200,000
	Operating Income	$570,000		$510,000
	Operating Income Per Unit	$2.85	(570,000/200,000)	$2.55
If 5% discount is given the target profit can easly achive.
	Revised Overhead Cost
	Cost Pool	Cost Driver	Quandity of Cost Driver	Cost per unit of Cost Driver
	Ordering Cost	Number of Order	400 (200,000/500)	$50.00
	Receiving and Storage	Loads Movement	4,000	$30.00
	Shipping	Shipments	2,000	$100.00

if 5% discount is given the target profit can easly achive.