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 ratio on any increased sales volume, after cost saving
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? That
is, what is the estimated change in pretax cash flow under the proposed system? Show calculations and round answers to the nearest whole dollar.
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 (to the nearest whole dollar) the firm should spend to reduce the cost of problems in the country by 90%?
Answers: 3
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