Gilles Laboratory

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

$1,500.00/mo
$2,375.00/mo

Michigan to Indianapolis (5,000 cases x 25 lbs) x 70 cents/cwt
Indianapolis to Columbus (15,000 cases x 25 lbs) x 1.365 cents* /cwt

$875.00/mo

$5,118.75/mo
$5,993.75/mo

Warehousing:

Columbus (15,000 cases x .25/case)
Indianapolis ($135,000** x 1.5%***)
$3,750.00/mo
___________
$6,125.00/mo
= $73,500/yr

$2025.00/mo
$8,018.75/mo = $96,225/yr

Inventory Carrying Cost
($113,250**** 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 40% = .2400
$1.50 x 35% = .5250
$2.40 x 25% = .6000
$1.3650/cwt
** Inventory turns 12 x per yr or once per mo. Since15,000 cases of product are shipped to Columbus each month, the average inventory must be 15,000 cases @ $18.00/case = $270,000

*** Arbitrary cost allocation, which needs to be investigated. Handling charges should not be allocated based on inventory levels. Students should use this cost in their 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 which equals a variable manufactured cost of 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