Reference no: EM132883171

Question - Lightening Bulk Company is a moving company specializing in transporting large items worldwide. The firm has an 80% on-time delivery rate. Twenty-eight percent of the items are misplaced and the remaining 2% are lost in shipping. On average, the firm incurs an additional $60 per item to track down and deliver misplaced items. Lost items cost the firm about $250 per item. Last year, the firm shipped 5,950 items with an average freight bill of $150 per item shipped.

 The firm's manager is considering investing in a new scheduling and tracking system costing $145,000 per year. The new system is expected to reduce misplaced items to 16% and lost items to 0.50%. Furthermore, the firm expects total sales to increase by 25% with the improved service. The average contribution margin ratio on any increased sales volume, after cost savings associated with a reduction in misplaced and lost items, is expected to be 32.5%.

Required -

1a. Based on a relevant cost analysis, should the firm install the new tracking system?

1b. What is the estimated change in pretax cash flow under the proposed system? (Negative amounts should be indicated by a minus sign. Round your answers to the nearest whole dollar amount.)

2. Upon further investigation, the manager discovered that 75% of the misplaced or lost items either originated in or were delivered to the same country. What is the maximum amount the firm should spend to reduce the cost of problems in that country by 85%?