Caldwell Supply, a wholesaler, has determined that its operations have three primary activities: purchasing, warehousing, and distributing. The company reports the following pertinent operating data for the year just completed:

Caldwell buys 100,000 units at an average unit cost of $10 and sells them at an average unit price of $20. The firm also has a fixed operating cost of $250,000 for the year. Caldwell's customers are demanding a 10 percent 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 2 percent discount.

 

Average unit cost…………………………………………………………………………………….	$ 10
Average selling price………………………………………………………………………………….	$ 20
Fixed operating cost………………………………………………………………………………….	$ 250,000
Customer-requested discount………………………………………………………………………..	10%
Supplier discount…………………………………………………………………………………….	2%
Units purchased……………………………………………………………………………………..	100,000

Required
Caldwell has estimated that it can reduce the number for purchasing orders to 680 and can decrease the cost of each shipment $3 with minor changes in its operations. Any further cost savings must come from reengineering the warehousing processes. What is the maximum cost (i.e., the target cost) for warehousing activities if the firm desires to earn the same amount of profit next year?

Transcribed Image Text:

Quantity of Cost Drive Cost per Unit of Cost Driver Activity Cost Driver Purchasing Warehousing Number of purchasing orders Number of moves Number of shipments 8,000 500 S150 S30 S80