Winnipeg Wholesale Distributors uses an activity-based costing system to determine the cost of handling its products. One important activity is the receiving of shipments in the warehouse. Three resources support that activity: Recording and record-keeping, labour, and inspection.

Recording and record-keeping is a cost driven by number of shipments received. The cost per shipment is $16.50.

Labour is driven by kilograms of merchandise received. Because labour is hired in shifts, it is fixed for large ranges of volume. Currently, labour costs are running $23,000 per month for handling 460,000 kilograms. This same cost would apply to all volumes between 300,000 kilograms and 550,000 kilograms.

Finally, inspection is a cost driven by the number of boxes received. Inspection costs are $2.75 per box.

One product distributed by Winnipeg Wholesale Distributors is candy. There is a wide variety of types of candy, so many different shipments are handled in the warehouse. In July the warehouse received 550 shipments, consisting of 4,000 boxes weighing a total of 80,000 kilograms.

1. Compute the cost of receiving shipments during July.

2. Management is considering elimination of brands of candy that have low sales levels. This would reduce the warehouse volume to 220 shipments, consisting of 2,500 boxes weighing a total of 60,000 kilograms. Compute the amount of savings from eliminating the low-sales-level brands.

3. Suppose receiving costs were estimated on a per kilogram basis. What was the total receiving cost per kilogram of candy received in July? If management had used this cost to estimate the effect of eliminating the 20,000 kilograms of candy, what mistake might have been made?