Use the following information to determine the changes in the following: cost of service failures (including invoice discount, rehandling cost, lost sales), net income, and Return on Assets.
Order fill increases from 92% to 98% with an average inventory increase of 25% and a 20
% increase in both warehousing and transportation costs.
Average price per order $250
Gross margin per order $87
Annual orders 250,000
Of orders not filled correctly, 80% may be rectified with an invoice discount of $100 and additional handling per rectified order of $35
Cash $5,000,000
Accounts receivable $3,490,000
Fixed assets $120,000,000
Warehousing cost $1,000,000
Other operating costs $1,200,000
Tax rate 20% of (EBIT-interest)
Transportation cost $800,000
Average inventory $2,000,000
Interest cost $400,000
Inventory carrying cost 10% per year
ABC Company is considering a move to outsource is warehousing operations. Current financial information is shown below.
Sales $500,000
Transportation cost $15,000
Warehousing cost $10,000
Inventory carrying cost 18%
Cost of goods sold $325,000
Other operating costs $95,000
Average inventory $50,000
Accounts receivable $30,000
Cash $15,000
Net fixed assets $850,000
Interest $10,000
Taxes 20% of (EBIT – Interest)
As a result of outsourcing warehousing the following changes will occur.
Net fixed assets reduced 15%
Inventory reduced 15%
Warehousing costs $0
Outsourcing provider costs $20,000
Determine the effect on ROA if warehousing is outsourced.
