Question

Kaune Food Products Company manufactures canned mixed nuts with an average manufacturing cost of $50 per case (a case contains 24 cans of nuts). Kaune sold 158,000 cases last year to the following three classes of customer:

Customer	Price per Case				Cases Sold
Supermarkets		$59				80,000
Small grocers		95				48,000
Convenience stores		90				30,000

The supermarkets require special labeling on each can costing $0.03 per can. They order through electronic data interchange (EDI), which costs Kaune about $56,000 annually in operating expenses and depreciation. Kaune delivers the nuts to the stores and stocks them on the shelves. This distribution costs $41,000 per year.

The small grocers order in smaller lots that require special picking and packing in the factory; the special handling adds $20 to the cost of each case sold. Sales commissions to the independent jobbers who sell Kaune products to the grocers average 6 percent of sales. Bad debts expense amounts to 7 percent of sales.

Convenience stores also require special handling that costs $25 per case. In addition, Kaune is required to co-pay advertising costs with the convenience stores at a cost of $18,000 per year. Frequent stops are made to each convenience store by Kaune delivery trucks at a cost of $30,000 per year.

Required:

1. Calculate the total cost per case for each of the three customer classes. Round intermediate calculations and final answers to four decimal places. Use the rounded values for subsequent requirements.

	Total Cost Per Case
Supermarkets	$
Small grocers	$
Convenience stores	$

2. Using the costs from Requirement 1, calculate the profit per case per customer class. Round intermediate computations to four decimal places and final answers to two decimal places.

	Profit Percentage Per Case
Supermarkets		%
Small grocers		%
Convenience stores		%

Does the cost analysis support the charging of different prices?

3. What if Kaune charged the average price per case to all customer classes? How would that affect the profit percentages?

Answer 1

1)

	SUPERMARKETS
Manufacturing cost	50
special labling	24*.03 = .72
Operating expense	56000/80000=.70
Distribution cost	41000/80000=.5125
Total cost per case	$ 51.9325 per case

	SMALL GROCERS
Manufacturing cost	50
special handling	20
sales commission	95*6%=5.7
Bad debt expense	95*7%=6.65
Total cost	82.35

	Convenience store
Manufacturing cost	50
special handling	25
Advertising	18000/30000=.60
Delivery cost	30000/30000= 1
Total cost	76.60

2)

	Profit per case	Profit as a % of total cost
SUPERMARKETS	59-51.9325=7.0675	7.0675/51.9325=13.61%
SMALL GROCERS	95-82.35=12.65	12.65/82.35=15.36%
CONVENIENCE STORES	90-76.60=13.40	13.40/76.60 = 17.49%

Yes ,cost analysis support the charging of different price since the cost for each customer class varies

3)

3)

Average price per case =[59*80000]+[95*48000]+90*30000] /158000

            =[4720000+ 4560000+ 2700000]/158000

             = 75.8228 per case

	Profit per case	Profit as a % of total cost
SUPERMARKETS	75.8228-51.9325=23.8903	23.8903/51.9325=46%
SMALL GROCERS	75.8228-82.35=--6.5272	-6.5272/82.35=-7.93%
CONVENIENCE STORES	75.8228-76.60=-.7772	-.7772/76.60 = -1.01%

If average price is charged then there will be loss from small grocers and convenience stores customer class .