Question

Activity-Based Customer-Driven Costs

Suppose that Stillwater Designs has two classes of distributors: JIT distributors and non-JIT distributors. The JIT distributor places small, frequent orders, and the non-JIT distributor tends to place larger, less frequent orders. Both types of distributors are buying the same product. Stillwater Designs provides the following information about customer-related activities and costs for the most recent quarter:

	JIT Distributors		Non-JIT Distributors
Sales orders	1,000		100
Sales calls	70		70
Service calls	350		175
Average order size	850		8,500
Manufacturing cost/unit	$125		$125
Customer costs:
Processing sales orders	$3,230,000
Selling goods	1,120,000
Servicing goods	1,050,000
Total	$5,400,000

Required:

1. Calculate the total revenues per distributor category, and assign the customer costs to each distributor type by using revenues as the allocation base. Selling price for one unit is $150. Round calculations to the nearest dollar.

	JIT		Non-JIT
Sales (in units)
Sales	$		$
Allocation	$		$

2. Conceptual Connection: Calculate the customer cost per distributor type using activity-based cost assignments. Round the interim calculations to the nearest dollar.

	JIT		Non-JIT
Ordering costs	$		$
Selling costs	$		$
Service costs	$		$
Total	$		$

For non JIT distributors by how much can the price be decreased without affecting customer profitability? Round your answer to the nearest cent.

$ per unit

Answer 1

	WORKINGS:
1)		JIT	Non-JIT	Total
	Sales orders	1,000	100	1,100
	Sales calls	70	70	140
	Service calls	350	175	525
	Average order size	850	8,500	9350
2)	Working of activity rates:
	Cost pool	Overhead	Activity	Activity
		Cost	Volume	Rate
	Processing sales orders	3230000	1,100	2936
	Selling goods	11,20,000	140	8000
	Servicing goods	10,50,000	525	2000
	Total	5400000
	ANSWERS:
1)		JIT	Non-JIT
	Sales (in units)	850000	850000
	Sales	127500000	127500000
	Allocation (Ratio of 1:1)	2700000	2700000
	Customer cost per unit	$         3.18	$          3.18
2)		JIT	Non-JIT
	Ordering costs	2936000	293600
	Selling costs	560000	560000
	Service costs	700000	350000
	Total	4196000	1203600	5399600
	Customer cost per unit	$         4.94	$          1.42
	Reduction in Non-JIT distributors price = 3.18-1.42 =		$          1.76