Super Performance Parts (SPP) produces braking devices exclusively for the Ace M

Question

Super Performance Parts (SPP) produces braking devices exclusively for the Ace Motor Company, an automotive manufacturer. SPP has been leasing warehouse space at a public facility 20 miles from the company’s plant. SPP has been approached by a group of four other Ace suppliers with the idea of building a consolidated warehouse to gain transportation and material handling economies. An investment of $200,000 would be required by each of five companies to acquire the warehouse. Payment of the initial investment secures 10 years of participation in the agreement. Annual operating expenses are anticipated to be $48,000 for each party. SPP is currently charged $6,000 per month for use of the public warehouse facilities. SPP’s outbound transportation from the public warehouse often consists of LTL quantities. Its annual outbound transportation bill is currently $300,000. SPP expects consolidated warehousing to more fully utilize truckload quantities with transportation expenses shared among the supplier pool. SPP’s annual outbound bill would be reduced by 25% in the consolidated plan. Differences in inbound transportation costs are assumed negligible in this case.

Compare the storage and shipping cost associated with consolidated warehousing as opposed to SPP’s current, direct shipping plan. Are any efficiencies apparent through consolidation?

Explanation / Answer

Working Note 1:

Storage Cost

In Direct Shipping Plan (current)                                                                           Amount

Annual charge for public warehouse facility ($ 6000*12)                                             $ 72000

In Consolidated Warehousing                                                                               Amount

*Cost of Warehouse ( Amortised over 10 years)                 -                                       $ 20000 ($200000/10)

Operating Expenses                                                       -                                        $ 48000

Total                                                                             -                                         $ 68000

Note: As the company will invest $ 200000 for 10 years in consolidated plan for new warehouse, i,e the annual burden should be charged for this cost is $200000/10=$20000.

Extra storage cost in Consolidated Plan (A-B) i.e. ($72000-$68000)                       -       $ 4000

Main Conclusion

Extra Storage cost in consolidated plan (working note 1)                                            -        $ 4000

Saving in Shipping Cost due to reduction in outbond bill               300000*25%)                                                                      -         $ 75000

Net Saving in consolidated plan ( $ 75000- $ 4000)                                               -         $ 69000

Conclusion

The company will be able to save $ 69000 in consolidated plan which will be benefical for it

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