Caldwell Supply, a wholesaler, has determined that its operations have three primary activities: purchasing, warehousing, and distributing. The firm reports the following operating data for the year just completed: Activity Cost Driver Quantity of Cost Driver Cost per Unit of Cost Driver Purchasing Number of purchase orders 1,060 $156 per order Warehousing Number of moves 8,600 36 per move Distributing Number of shipments 560 86 per shipment Caldwell buys 100,600 units at an average unit cost of $16 and sells them at an average unit price of $26. The firm also has fixed operating costs of $250,600 for the year. Caldwell’s customers are demanding a 16% 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 10% discount. Required: Caldwell has estimated that it can reduce the number of purchase orders to 740 and can decrease the cost of each shipment by $9 with minor changes in its operations. Any further cost savings must come from reengineering the warehousing processes. What is the maximum cost (i.e., target cost) for warehousing if the firm desires to earn the same amount of profit next year?
Problem 13-41 (Algo) Target Cost; Warehousing [LO 13-1]
Caldwell Supply, a wholesaler, has determined that its operations have three primary activities: purchasing, warehousing, and distributing. The firm reports the following operating data for the year just completed:
| Activity | Cost Driver | Quantity of Cost Driver | Cost per Unit of Cost Driver | |
|---|---|---|---|---|
| Purchasing | Number of purchase orders | 1,060 | $156 | per order |
| Warehousing | Number of moves | 8,600 | 36 | per move |
| Distributing | Number of shipments | 560 | 86 | per shipment |
Caldwell buys 100,600 units at an average unit cost of $16 and sells them at an average unit price of $26. The firm also has fixed operating costs of $250,600 for the year.
Caldwell’s customers are demanding a 16% 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 10% discount.
Required:
Caldwell has estimated that it can reduce the number of purchase orders to 740 and can decrease the cost of each shipment by $9 with minor changes in its operations. Any further cost savings must come from reengineering the warehousing processes. What is the maximum cost (i.e., target cost) for warehousing if the firm desires to earn the same amount of profit next year?
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