Question

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	900		90
Sales calls	70		70
Service calls	350		175
Average order size	650		6,500
Manufacturing cost/unit	$125		$125
Customer costs:
Processing sales orders	$3,180,000
Selling goods	1,120,000
Servicing goods	1,050,000
Total	$5,350,000

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

NonJIT Distributors 90 JIT Distributors 900 650 585000 Sales order (A) Average Order Size (B) Sales in Units ( A*B) 26 6500 585000 28 29 Sales in Units Selling price Total Sales 585000 150 87750000 585000 150 87750000 Total Customer Cost Allocated equally (5350000 *1/2) 5350000 2675000 2675000

Activity Processing Sales Orders Selling Goods Servicing Goods Cost driver Sales order Sales Calls Service Calls Amount (A) 3180000 1120000 1050000 Activity Usage (B) 990 140 525 Activity Rate (A/B) 3,212 Per Sales Order 8,000 Per Sales Calls 2,000 Per Service call Ordering Costs @ 3212 (3212*900) Selling Cost @8000 ( 8000*70) Service Costs @ 2000 ( 2000 * 350) Total JIT Distributors 2,890,800 560,000 700.000 4,150,800 NonJIT Distributors 289,080 (3212 *90) 560,000 (8000*70) 350,000 (2000*175) 1,199,080 For the non-JIT distributors, the customer costs amount to (2,675,000/90) = $29.722.22per order under the original allocation. Using activity assignments,this drops tol 1,199,080/90 )= $13,323.11 per order resulting in a difference of $16.399.11 (29722.22-13323.11) per order.