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Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of...

Price Discrimination, Customer Costs

Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 425,000 units. A large chain store purchases about 30 percent of Jorell's production. Several thousand independent retail office supply stores purchase the other 70 percent. Jorell incurs the following costs of production per labeler:

Direct materials $9.15
Direct labor 2.05
Overhead 3.60
  Total $14.80

Jorell has two salespeople assigned to the chain store account at a cost of $55,100 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $765 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $38,600 each. Delivery costs vary from store to store, averaging $0.61 per unit.

Jorell charges the chain store $17.20 per labeler and the independent office supply stores $20.40 per labeler.

Required:

Is Jorell’s pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevant calculations. (Round unit costs to the nearest cent.)
No , the cost differential of $ does not justify the price differential of $3.20.

Solutions

Expert Solution

Cost of labeler for two different class of customer
Large Chain Store Retail office supply store Defferential
Sales Pice $17.20 $20.40 ($3.20)
Direct cost $14.80 $14.80 $0.00
Sales person salary per unit $0.86 $1.04 ($0.18)
Delivery expenses $0.51 $0.61 ($0.10)
Total Unit Cost $16.17 $16.45 ($0.28)
Margin per unit $1.03 $3.95 ($2.92)
No, the cost differencial of $0.28 does not justify the price differential of $3.20
Working note:
Sales person assigned to chain store 2
Salary each person $55,100
Total salary expense $110,200
Number of units sold to chain store (425000 x 30%)            127,500
Cost per unit 0.864313725
Sales person assigned to retail store 8
Salary each person $38,600
Total salary expense $308,800
Number of units sold to chain store (425000 x 70%)            297,500
Cost per unit 1.037983193
Delivery expense
Delivery expense per batch $765
Number of units per batch 1500
Delivery expense per unit $0.51

ekkarill92 answered 2 years ago
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