Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 15

Target Cost; Warehousing 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:

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% 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% discount.
Required Caldwell has estimated that it can reduce the number of 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., target cost) for warehousing if the firm desires to earn the same amount of profit next year