1) ReadersNet.Com sells books and software over the Internet. A recent article in a trade journal has caught the attention of management, given that the company has experienced soaring inventory handling costs. The article noted that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales, which is attractive when compared against ReadersNet.Com's results for the past year. The following information is available:
|
Activity
(Cost)
|
Cost Driver
|
Cost Driver Quantity
|
Percent of Cost Driver Activity for Books
|
Percent of cost driver activity for Software
|
|
Incoming receipts ($600,000)
|
Number of purchase orders
|
2,000
|
70%
|
30%
|
|
Warehousing ($720,000)
|
Number of inventory moves
|
9,000
|
80%
|
20%
|
|
Outgoing shipments
|
Number of shipments
|
15,000
|
25%
|
75%
|
Book sales totaled $7,800,000 and software sales totaled $5,200,000. A review of the company's activities found various inefficiencies with respect to the warehousing of books and outgoing shipments of software. These inefficiencies resulted in an extra 550 moves and 250 shipments, respectively.
Required:
a. What is activity-based management? What is a non-value added activity?
b. How much did non value-added activities cost ReadersNet.Com this past year?
c. What could be the possible reasons that may have resulted innon value-added activities for ReadersNet.Com? Please be brief (No more than one paragraph)
d. Will the elimination of non value-added activities allow ReadersNet.Com to achieve a13% cost percentage for each of the product line? Show calculations.
e. Do either of the two product lines require additional cost cutting to achieve the target cost percentage? If so, how much additional cost cutting is needed?