Memphis Wholesale Distributors uses an ABC system to determine the cost of handling its products. One important activity is receiving shipments in the warehouse. Three resources support that activity:

(1) recording and record keeping, (2) labor, and (3) inspection.

Recording and record keeping is a variable cost driven by number of shipments received. The cost per shipment is $20.

Labor is driven by pounds of merchandise received. Because labor is hired in shifts, it is fixed for large ranges of volume. Currently, labor costs are running $32,200 per month for handling 460,000 pounds. This same cost would apply to all volumes between 300,000 pounds and 550,000 pounds.

Finally, inspection is a variable cost driven by the number of boxes received. Inspection costs are $3.75 per box.

One product distributed by Memphis Wholesale Distributors is cans of soup. There is a wide variety of soups so many different shipments are handled in the warehouse. In July, the warehouse received 500 shipments, consisting of 4,000 boxes weighing a total of 80,000 pounds.

1. Compute the cost of receiving soup shipments during July.

2. Management is considering elimination of brands of soup that have small sales levels. This would reduce the warehouse volume to 200 shipments, consisting of 3,000 boxes weighing a total of 60,000 pounds. Compute the amount of savings from eliminating the small-sales-level brands.

3. Suppose receiving costs were estimated on a per-pound basis. What was the total receiving cost per pound of soup received in July? If management had used this cost to estimate the effect of eliminating the 20,000 pounds of soup, what mistake might be made?