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	1,200		120
Sales calls	70		70
Service calls	350		175
Average order size	550		5,500
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

	JIT	Non-JIT
	Distributors	Distributors
Sales orders	1,200	120
Sales calls	70	70
Service calls	350	175
Average order size	550	5,500
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
	JIT	Non-JIT
Sales (in units)	660,000	660,000
Sales	99,000,000	99,000,000
Allocation	2,675,000	2,675,000
Under Activity based = Overhead Cost*Driver Consumed/Total Consumption
	JIT	Non-JIT
Ordering costs	$2,890,909.09	$289,090.91
Selling costs	$560,000.00	$560,000.00
Service costs	$700,000.00	$350,000.00
Total	$4,150,909.09	$1,199,090.91
The price can be decreased by	$1,475,909.09
Per unit	2.24