Question

Costs of Different Customer Classes

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 159,000 cases last year to the following three classes of customer:

Customer	Price per Case				Cases Sold
Supermarkets		$66				80,000
Small grocers		97				49,000
Convenience stores		91				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 $57,000 annually in operating expenses and depreciation. Kaune delivers the nuts to the stores and stocks them on the shelves. This distribution costs $43,000 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 $27 per case. In addition, Kaune is required to co-pay advertising costs with the convenience stores at a cost of $15,000 per year. Frequent stops are made to each convenience store by Kaune delivery trucks at a cost of $24,000 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		%

Answer 1

Sol: The values provided in the question are as follows:

Manufacturing cost per case = $50

Number of cans in a case = 24

Special labeling cost per can for supermarkets = $0.03

Operating expenses and depreciation per year = $57000

Distribution costs per year = $43000

Cases sold to supermarkets = 80000

Price per case for supermarkets = $66

Special handling cost per case for small grocers = $20

Sales commission = 6% of sales

Bad debt expenses = 7% of sales

Cases sold to small grocers = 49000

Price per case for small grocers = $97

Special handling cost per case for convenience stores = $27

Advertising costs per year = $15000

Delivery costs per year = $24000

Cases sold to convenience stores = 30000

Price per case for convenience stores = $91

1. Total cost per case for supermarkets = Manufacturing cost per case + Special labeling cost per case for supermarkets + Operating expenses and depreciation per case + Distribution costs per case

= Manufacturing cost per case + (Special labeling cost per can for supermarkets * Number of cans in a case) + (Operating expenses and depreciation per year / Cases sold to supermarkets) + (Depreciation costs per year / Cases sold to supermarkets)

= $50 + ($0.03 * 24) + ($57000 / 80000) + ($43000 / 80000)

= $50 + 0.72 + $0.7125 + $0.5375

= $51.97

Total cost per case for small grocers = Manufacturing cost per case + Special handling cost per case for small grocers + Sales commission per case + Bad debt expenses per case

= Manufacturing cost per case + Special handling cost per case for small grocers + (Total sales commission / Cases sold to small grocers) + (Total bad debt expenses / Cases sold to small grocers)

= $50 + $20 + ((6/100 * $97 * 49000) / 49000) + ((7/100 * $97 * 49000) / 49000)

= $50 + $20 + $5.82 + $6.79

= $82.61

Total cost per case for convenience stores = Manufacturing cost per case + Special handling cost per case for convenience stores + Advertising costs per case + Delivery costs per case

= Manufacturing cost per case + Special handling cost per case for convenience stores + (Advertising costs per year / Cases sold to convenience stores) + (Delivery costs per year / Cases sold to convenience stores)

= $50 + $27 + ($15000 / 30000) + ($24000 / 30000)

= $50 + $27 + $0.5 + $0.8

= $78.3

2. Profit per case for supermarkets = Price per case for supermarkets - Total cost per case for supermarkets

= $66 - $51.97

= $14.03

Profit percentage per case for supermarket = (Profit per case for supermarkets/ Total cost per case for supermarkets) * 100

= ($14.03 / $51.97) * 100

= 0.26996 * 100

= 0.27 * 100 (rounded to 4 decimal places)

= 27 percent

Profit per case for small grocers = Price per case for small grocers - Total cost per case for small grocers

= $97 - $82.61

= $14.39

Profit percentage per case for small grocers = (Profit per case for small grocers / Total cost per case for small grocers) * 100

= ($14.39 / $82.61) * 100

= 0.17419 * 100

= 0.1742 * 100 (rounded to 4 decimal places)

= 17.42 percent

Profit per case for convenience stores = Price per case for convenience stores - Total cost per case for convenience stores

= $91 - $78.3

= $12.7

Profit percentage per case for convenience stores = (Profit per case for convenience stores / Total cost per case for convenience stores) * 100

= ($12.7 / $78.3) * 100

= 0.16219 * 100

= 0.1622 * 100 (rounded to 4 decimal places)

= 16.22 percent