Reference no: EM132846456

Problem - Lightening Bulk Company is a moving company specializing in transporting large items worldwide. The firm has an 91% on-time delivery rate. Nineteen percent of the items are misplaced and the remaining 2% are lost in shipping. On average, the firm incurs an additional $71 per item to track down and deliver misplaced items. Lost items cost the firm about $360 per item. Last year, the firm shipped 6,060 items with an average freight bill of $260 per item shipped.

The firm's manager is considering investing in a new scheduling and tracking system costing $201,000 per year. The new system is expected to reduce misplaced items to 7% and lost items to 0.50%. Furthermore, the firm expects total sales to increase by 16% 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 43.5%.

Required - Upon further investigation, the manager discovered that 86% 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 96%?