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 100,700 units at an average unit cost of $17 and sells them at an average unit price of $27. The firm also has fixed operating costs of $250,700 for the year.

Caldwells customers are demanding a 17% discount for the coming year. The company expects to sell the same amount if the demand for price reduction can be met. Caldwells suppliers, however, are willing to give only a 11% discount.

Required: Caldwell has estimated that it can reduce the number of purchase orders to 750 and can decrease the cost of each shipment by $10 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?

Activity Purchasing Warehousing Distributing Cost Driver Number of purchase orders Number of moves Number of shipments Quantity of Cost per Unit of Cost Cost Driver Driver 1,070 $ 157 per order 8,700 37 per move 570 87 per shipment Maximum cost