Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 32

Relevant Costs and Quality Improvement Lightening Bulk Company is a moving company specializing in transporting large items worldwide. The firm has an 85% on-time delivery rate. Thirteen percent of the items are misplaced and the remaining 2% are lost in shipping. On average, the firm incurs an additional $65 per item to track down and deliver misplaced items. Lost items cost the firm about $300 per item. Last year the firm shipped 6,000 items with an average freight bill of $200 per item shipped.
The firm's manager is considering investing in a new scheduling and tracking system costing $125,000 per year. The new system is expected to reduce misplaced items to 1% and lost items to 0.5%. Furthermore, the firm expects total sales to increase by 10% with the improved service. The average contribution margin on any increased sales volume, after cost savings associated with a reduction in misplaced and lost items, is expected to be 37.5%.
Required
1. Based on a relevant-cost analysis, should the firm install the new tracking system Show calculations.
2. What other factors does the firm's manager need to consider in making the decision
3. Upon further investigation, the manager discovered that 80% of the misplaced or lost items either originated in or were delivered to the same country. What is the maximum amount the firm should spend to reduce the problems in that country by 90%