GILES LABORATORIES 1. What are the financial implications associated with closing the Columbus warehouse? Alternatives Cost Categories Retain Columbus Close Columbus Transportation: Michigan to Columbus (5,000 cases x 25 lbs. ) x 70 cents / cwt Indianapolis to Columbus (10,000 cases x 25 lbs. ) x 60 cents/cwt. $875. 00/mo $2,375. 00/mo Michigan to Indianapolis (5,000 cases x 25 lbs) x 70 cents/cwt Indianapolis to Columbus (1 5,000 cases x 25 lbs) x 1. 365 cents* ‘cwt $875. 00/t-no $5,118. 75/t-no $5,993. 75/mo Warehousing: Columbus (1 5,000 cases x . 25/case) Indianapolis x $3,750. 0/mo = $73,500/yr 2025. oo,’t-no $8,018. 75/t-no = $96,225/yr Inventory Carrying Cost x 37. 01 $41,913. 83 $115,413. 83 $96,225. 00 Difference in favor of closing Columbus is $19,188. 83 * Weighted Average Cost / cwt $. 60 x = . 2400 = . 5250 $2. 40 x = . 6000 $1. 3650/cwt ** Inventory turns 12 x per yr or once per mo. Sincel 5,000 cases of product are shipped to Columbus each month, the average inventory must be 1 5,000 cases @ $18. 00/case = $270,000 *** Arbitrary cost allocation, which needs to be investigated. Handling charges should not be allocated based on inventory levels.
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Students should use this cost in heir analysis, but should understand the need to question its accuracy. **** Inventory reduction system-wide is estimated at $135,000. Therefore, the other $135,000 of Columbus inventory will be shifted to the Indianapolis plant warehouse. Consequently, the retain Columbus option results in $135,000 more inventory at full manufactured cost wnlcn equals a varlaDle manuTacturea cost 0T plus variable transportation cost of (Indianapolis to Columbus freight) plus variable handling cost of Total Variable Cost $108,000 $1,500 $3,750 $113,250 4.
How would you incorporate customer service considerations into your analysis? How much would sales volume have to change in order to change your answer to question #1? Since it is not known how customers will react to an increase in order cycle time, it is important to consider the $19,188. 83 savings associated with closing Columbus in light of the percentage decrease in sales that would reduce this savings to zero: Selling price of a case of product $24. 90 Variable manufactured cost [$18. 00 x 80%] $14. 40 Transportation cost to Columbus market (from Indianapolis) $0. 4 Transportation cost (Michigan to Indianapolis 18 cents per case for one third of the ases $0. 06 Inventory carrying costs per case $0. 44 Other variable costs (local delivery and marketing costs such as sales commission) $1. 66 $16. 90 Contribution / case $8. 00 Savings associated with closing Columbus divided by the contribution per case = $19,188. 83 / $8. 00 per case = 2,399 cases. That is, if sales were to decrease by 2,399 cases because customers perceived a decrease in customer service levels, the $19,188. 83 savings would be eliminated. Since annual sales in the Columbus market are 180,000 cases (1 5,000 cases/mo. 12 months), a sales decrease of 1. percent (2,399 / 180,000 x 100%) would make closing Columbus a break-even proposition. If sales were to decrease by more than 1. 3 percent as a result of closing the Columbus warehouse, profits would be reduced. Since the company is not reaching its current service objectives this issue is Important. wnlle tne lead-times may lengtnen as a result 0T closing tne ColumDus facility, in-stock availability should improve since Indianapolis is a plant location. Thus, if fill rate is more important to customers than lead-time, customer service will actually improve by closing Columbus.