Homework SourseBookWeb Inc sells books and software over the Internet A rec
BookWeb, Inc., sells books and software over the Internet. A recent article in a trade journal has caught the attention of management because the company has experienced soaring inventory handling costs. The article notes that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales. Thirteen percent is attractive to BookWeb management when compared to its results for the past year, shown in the following table.
Book sales revenue totaled $3,900,000 and software sales revenue totaled $2,600,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of books and the outgoing shipments of software. In particular, book misplacements resulted in an extra 550 moves and software had 250 incorrect shipments.
Problem 19.7A Part e
e-1. Do either of the product lines require additional cost cutting to achieve the target percentages?
e-2. How much additional cost cutting is needed to achieve the target percentages?
| Activity (cost) | Cost Driver | Cost Driver Quantity | % of Cost Driver for Books | % of Cost Driver for Software | ||||||||
| Incoming receipts ($300,000) | Number of purchase orders | 2,000 | 70 | % | 30 | % | ||||||
| Warehousing ($360,000) | Number of inventory moves | 9,000 | 80 | 20 | ||||||||
| Shipments ($225,000) | Number of shipments | 15,000 | 25 | 75 | ||||||||
Solution
Solution e-1:
Existing inventory handling cost as % of revenue:
Books = $554,250 / $3,900,000 = 14.21%
Software = $330,750 / $2,600,000 = 12.72%
Inventory handling cost as % of sales revenue for software product line is with in target. However inventory handling cost of books proudction line requires additional cost cutting to achieve the target percentage.
Solution e-2:
Target cost of book product line = $3,900,000 * 13% = $507,000
Existing inventory handling cost of books product line = $554,250
Additional cost cutting needed to acheive target pecentages = $554,250 - $507,000 = $47,250
| Computation of inventory handling cost of each product line - Book Web Inc. | ||||||||
| Activity | Activity Cost | Cost Driver | Cost Driver Quantity | Activity Rate | Books | Software | ||
| Usage | Allocated Costs | Usage | Allocated Costs | |||||
| Incomeing Receipts | $300,000.00 | Nos of purchase orders | 2000 | $150.00 | 1400 | $210,000.00 | 600 | $90,000.00 |
| Warehousing | $360,000.00 | Setup hours | 9000 | $40.00 | 7200 | $288,000.00 | 1800 | $72,000.00 |
| Shipments | $225,000.00 | Number of products | 15000 | $15.00 | 3750 | $56,250.00 | 11250 | $168,750.00 |
| Total | $885,000.00 | $554,250.00 | $330,750.00 |
