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

Selling price to retailers/pack	14.25	15*(1-5%)
Cost /pack	9.7	10*(1-3%)
Contribution /pack	4.55
Total contribution-- 200000*4.55=	910000
Less: Activity costs:
Ordering	20000	200000/500*50
Receiving & storing	1500	200000/4000*30
Shipping	10000	200000/2000*100
Total costs	31500
Profit	878500
Contribution/pack	4.55
Less: Activity costs/pack 31500/200000=	0.1575
Profit / pack	4.3925

YES, Celine will be able to achieve more than its target operating income of $90,000 and its target operating in- come per unit of $0.36 per pencil pack in 2021

With the given changes, ie.it achieves, $ 878500 profit , ie. $ 4. 39 / pack

YES, Celine will be able to achieve more than its target operating income of $90,000 and its target operating in- come per unit of $0.36 per pencil pack in 2021.