Problem $2.$ CLGN Book Distribution is a new Internet company that began operation in $2001$ for the sale and distribution of college textbooks and supplies. CLGN$\text{'}$s original mission was to be a low price seller of college textbooks and instructional materials. The typical textbook price at CLGN averaged $15\%$ below that of the local bookstore, and supplier averaged $20\%$ lower. When the cost of shipping was included, the landed cost of the textbook was about $10\%$ lower and materials $15\%$ lower than local bookstores. The inventory carrying cost is $30\%$ of the value of average inventory held per year. The corporate tax rate was $40\%.$ Total orders in $2007$ is $1\mathrm{.}5$ million $($ $$150$ million in sales at an average sales price per order of $$100.$ Construct the income statement and balance sheet. Costs of the goods are $$80$ million. Transportation cost is $$6$ million. Warehousing cost is $$1\mathrm{.}5$ million. Other operating cost is $30$ million. Interest paid is $$12$ million. Inventory is $$10$ million. Account receivable is $$30$ million. Cash is $$15$ million. Fixed asset is $$90$ million. Current liability is $$65$ million. Long term liability is $$35$ million.

When CLGN management considers the choices of different cost reduction, they should also take into account the impact on service. When a service failure happens, a portion of the customers experiencing the service failure will request that the orders be corrected, and the others will refuse the orders. The refused orders represent lost sales revenue that need to be deducted from total sales. For the rectified orders, the customers might request an invoice deduction to compensate them for any inconvenience or added costs. Finally, the seller incurs a rehandling cost associated with correcting the order such as reshipping the correct items and returning the incorrect and refused items. The management wants to study the impact of improving: $1.$ on$-$time delivery rate; $2.$ order fill rate.

Assume that other setups are the same as in example$-3($except that the interest paid is $3$ million now$).$ Assume that the lost sales rate for on$-$time delivery failure is $10\%,$ the lost sales rate for order fill failure is $20\%,$ the rehandling charge is $$20$ per rectified and refused order, the invoice deduction is $$10$ per rectified order.

Question $1$: Should the company increase order fill correct rate by $1\%($currently it is $97\%,$ when increasing to $98\%,$$$100,000$ additional warehousing cost is incurred$)$

Question $2$: Should the company decrease the order fill correct rate by $1\%($currently it is $97\%,$ when reduced to $96\%,$$$80,000$ warehousing cost is saved.$).$