Question

Deeds Company sells custom-made machine parts to industrial equipment manufacturers by bidding cost plus 40 percent, where cost is defined as manufacturing cost plus order processing cost. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Cost and sales information by customer category is provided below.

Frequently Ordering Customers				Less Frequently Ordering Customers
Sales orders		37,000				3,700
Order size		15				150
Average unit manufacturing cost		$40				$40

Order-processing activity costs:
Processing sales orders						$2,878,500

Order-filling capacity is purchased in steps (order-processing clerks) of 1,000, each step costing $45,000; variable order-filling activity costs are $35 per order. The activity capacity is 55,000 orders; thus, the total order-filling cost is $3,899,500 [(55 steps × $45,000) + ($35 × 40,700)]. Current practice allocates ordering cost in proportion to the units purchased.

Deeds recently lost a bid for 100 units. (The per-unit bid price was $2 per unit more than the winning bid.) The manager of Deeds was worried that this was a recurring trend for the larger orders. (Other large orders had been lost with similar margins of loss.) No such problem was taking place for the smaller orders; the company rarely lost bids on smaller orders.

1. Calculate the unit bid price offered to Deeds’s customers assuming that order-filling cost is allocated to each customer category in proportion to units sold. Note: Do not round interim calculations. Round your final answer to the nearest cent.
$

2. Assume that a newly implemented ABC system concludes that the number of orders placed is the best cost driver for the order-filling activity. Assign order-filling costs using this driver to each customer type and then calculate the new unit bid price for each customer type. Note: Do not round interim calculations. Round the final order cost allocation to the nearest whole dollar. Round final bid prices to the nearest cent.

	Order Cost Allocation round to whole dollar	Bid Price round to two decimals
Frequently ordering	$	$
Less frequently ordering	$	$

3. What if Deeds offers a discount for orders of 35 units or more to the frequently ordering customers? Assume that all the frequently ordering customers can and do take advantage of this offer at the minimum level possible. Compute the new order cost allocation and bid price.

Note: Round the number of steps UP to the nearest whole number, using that result in future calculations. For the Order Cost Allocation and Bid Price, do not round interim calculations. Then round the final order cost allocation to the nearest whole dollar and final Bid Price the nearest cent.

	Order Cost Allocation round to whole dollar	Bid Price round to two decimals
Frequently ordering	$	$

Can Deeds offer the original price from Requirement 1 to the frequently ordering customers and not decrease its profitability?

Answer 1

1.)

Particulars	Frequently Ordering Customers	Less Frequently Ordering Customers
Sales Order	37000	3700
Order Size	15	150
No of Units Purchased	555000	555000
Average Unit Manufacturing Cost	40	40
Total Manufacturing Cost	22200000	22200000
Processing Sales Orders		2878500

Order filling cost allocated for both customers = 3899500/2 = 1949750
Unit Bid Price for frequently ordering customers = ((1.4*(22200000+1949750))/555000)
=60.92.
Unit Bid for less frequently ordering customers = (1.4*(22200000+1949750)/555000) = 60.92

2.)

Order filling rate = 3899500/40700 = $95.81 per order
Order filling cost of frequently Ordering Customers = 95.81*37000 = $3544970
Order filling cost of less frequently Ordering Customers = 95.81*3700 = $354497

Unit Bid for less frequently ordering customers = (1.4*(22200000+3544970)/555000 = 64.94
Unit Bid for less frequently ordering customers = (1.4*(22200000+354497)/555000 = 55.89

3.)

New sales order = 555000/35 = 15857 Units
Therefore New Sales order = 19557 Units
New Ordering filling cost = (20*45000 + 35*19557) = 1584495
Order filling cost assigned to frequent category = (15857/19557)*1584495 = 1284723
Unit Bid for frequently ordering customers = (1.4*(22200000+1284723)/555000= 42.31

Yes Deeds can offer the original price of the frequently ordering customers because the bidding rate with that price is more.