# Gilles Laboratory Essay

GILES LABORATORIES
1.What are the financial implications associated with closing the Columbus warehouse?

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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

4.How would you incorporate customer service considerations into your analysis? How much would sales volume have to change in order to change your answer to question #1? Since it is not known how customers will react to an increase in order cycle time, it is important to consider the \$19,188.83 savings associated with closing Columbus in light of the percentage decrease in sales that would reduce this savings to zero: Selling price of a case of product

\$24.90
Variable manufactured cost [\$18.00 x 80%]
\$14.40

Transportation cost to Columbus market (from Indianapolis)
\$0.34

Transportation cost (Michigan to Indianapolis 18 cents per case for one third of the cases \$0.06

Inventory carrying costs per case
\$0.44

Other variable costs (local delivery and marketing costs such as sales commission) \$1.66
\$16.90
Contribution / case

\$8.00
Savings associated with closing Columbus divided by the contribution per case = \$19,188.83 / \$8.00 per case = 2,399 cases.
That is, if sales were to decrease by 2,399 cases because customers perceived a decrease in customer service levels, the \$19,188.83 savings would be eliminated. Since annual sales in the Columbus market are 180,000 cases (15,000 cases/mo. x 12 months), a sales decrease of 1.3 percent (2,399 / 180,000 x 100%) would make closing Columbus a break-even proposition. If sales were to decrease by more than 1.3 percent as a result of closing the Columbus warehouse, profits would be reduced.

Since the company is not reaching its current service objectives this issue is important. While the lead-times may lengthen as a result of closing the Columbus facility, in-stock availability should improve since Indianapolis is a plant location. Thus, if fill rate is more important to customers than lead-time, customer service will actually improve by closing Columbus.

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