Problem 18.26 - Price Discrimination, Customer Costs Jorvell, Inc. maufactures a
ID: 2558790 • Letter: P
Question
Problem 18.26 - Price Discrimination, Customer Costs Jorvell, Inc. maufactures and distributes a variety of labelers. Annual production of labelers averages 340,000 units. A large chain store purchases about 30% of Jorell's procution. Several thousand independent retail office supply stores purchase the other 70%. Jorell incurs the following costs of production per labeler: Direct materials $ 8.90 Direct labor $ 2.40 Overhead $ 3.20 Total $ (14.50) Jorell has two salespeople assigned to the chain store at a cost of $55,000 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $750 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,000 each. Delivery costs vary from store to strore, averaging $0.60 per unit. Jorell charges the chain store $16.50 per labeler and the independent office supply stores $20 per labeler. Required: Is Jorells pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevent calculations. (Round unit costs to the nearest cent.) Chain Store Costs: Small Retail Store Costs: Sales salaries $ 110,000 Sales support $ 328,000 Delivery cost Delivery cost Total Total Number of units Number of units Cost per unit Cost per unit Is the pricing policy supported by cost differences in serving the two different classes of customer? Problem 18.26 - Price Discrimination, Customer Costs Jorvell, Inc. maufactures and distributes a variety of labelers. Annual production of labelers averages 340,000 units. A large chain store purchases about 30% of Jorell's procution. Several thousand independent retail office supply stores purchase the other 70%. Jorell incurs the following costs of production per labeler: Direct materials $ 8.90 Direct labor $ 2.40 Overhead $ 3.20 Total $ (14.50) Jorell has two salespeople assigned to the chain store at a cost of $55,000 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $750 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,000 each. Delivery costs vary from store to strore, averaging $0.60 per unit. Jorell charges the chain store $16.50 per labeler and the independent office supply stores $20 per labeler. Required: Is Jorells pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevent calculations. (Round unit costs to the nearest cent.) Chain Store Costs: Small Retail Store Costs: Sales salaries $ 110,000 Sales support $ 328,000 Delivery cost Delivery cost Total Total Number of units Number of units Cost per unit Cost per unit Is the pricing policy supported by cost differences in serving the two different classes of customer?Explanation / Answer
1. CALCULATION OF COST DIFFERENCES BETWEEN THE 2 POLICIES :
Thus, clearly, there exist cost differences in serving the two different classes of customer. But the difference in cost of both the units is $0.40 whereas the difference in Selling price is $3.50 per unit more for small retail stores and offices.
Since the cost to the company for small stores is more, therefore, the differential pricing policy is justified . Also, it is evident that the margin of profit that the company earns from outside stores is much more than the profit it earns through the chain stores. Hence, for higher profits, the pricing policy is justified to some extent.
PARTICULARS CHAIN STORES SMALL RETAIL STORES Sales salaries $110000 $328000 Delivery cost $51000 $142800 (102000units/1500)*$750 (238000units * $0.60) Total cost (other than variable) $161000 $470800 No. of units 102000 238000 Cost per unit $1.58 per unit $1.98 per unit Variable cost per unit $14.50 $14.50 Total cost $ 16.08 per unit $16.48 per unit