Homework 2

Target prices, target costs, activity-based costing. Snappy Tiles is a small distributor of marble
tiles. Snappy identifies its three major activities and cost pools as ordering, receiving and
storage, and shipping, and it reports the following details for 2016:

For 2016, Snappy buys 250,000 marble tiles at an average cost of $3 per tile and sells them to
retailers at an average price of $4 per tile. Assume Snappy has no fixed costs and no inventories.

Required:
1.Calculate Snappy’s operating income for 2016.
2.For 2017, retailers are demanding a 5% discount off the 2016 price. Snappy’s suppliers
are only willing to give a 4% discount. Snappy expects to sell the same quantity of
marble tiles in 2017 as in 2016. If all other costs and cost-driver information remain the
same, calculate Snappy’s operating income for 2017.
3.Suppose further that Snappy decides to make changes in its ordering and
receiving-and-storing practices. By placing long-run orders with its key suppliers, Snappy
expects to reduce the number of orders to 200 and the cost per order to $25 per order. By
redesigning the layout of the warehouse and reconfiguring the crates in which the marble
tiles are moved, Snappy expects to reduce the number of loads moved to 3,125 and the
cost per load moved to $28. Will Snappy achieve its target operating income of $0.30 per
tile in 2017? Show your calculations.

Data

Activity Cost Driver Quantity of Cost Driver Cost Per Unit Of Cost Driver
Placing and paying for orders of marble tiles Number of Orders 500 $ 50 Per order
Receiving and storage Loads Moved 4,000 $ 30 Per load
Shipping of marble tiles to retailers Number of Shipments 1,500 $ 40 Per Shipment
Activity
Number of Marble tiles 250,000
Average Cost Per tile $ 3
Price per tile $ 4

Discount off Demanded by retailers 5%

Discount Suppliers Willing to give 4%

Analysis

1) 2016 Operating Income

Placing orders cost 25,000

Receiving and storage 120,000
Shipping 60,000
Fixed Cost 205,000

Sales Revenue 1,000,000

Cost of goods sold 750,000
Contribution Margin 250,000
Fixed Cost 205,000
Operating Income 45,000

2) 2017 Operating Income

New Selling Price $ 3.80

New Cost Price $ 2.88

Sales Revenue 950,000

Cost of Goods Sold 720,000
Contribution Margin 230,000
Fixed Cost 205,000
Operating Income 25,000

3) Will the company achieve its target operating income?

Decreased Number of Orders 200 $ 25 Per order

Decreased Loads Moved 3,125 $ 28 Per load

Targeted Operating Income per tile $ 0.30

Placing orders cost 5,000

Receiving and storage 87,500
Shipping 60,000
Fixed Cost 152,500

Total Sales Revenue 950,000

Cost of Goods sold 720,000
Contribution Margin 230,000
Fixed Cost 152,500
Operating Income 77,500
Will Snappy achieve its target operating
income of $0.30 per tile in 2017? YES