Question

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	900		90
Sales calls	70		70
Service calls	350		175
Average order size	650		6,500
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

1		JIT	Non-JIT
	Sales (in units)	585,000	585,000
	(900 x 650), (90 x 6,500)
	Sales Revenue	$87,750,000	$87,750,000
	(585,000 x $150)
	Allocation	2,675,000	2,675,000
2		JIT	Non-JIT
	Ordering costs
	[$3,180,000 / (900+90)] x 900 for JIT or x 90 for Non-JIT	$2,890,909	$289,091
	Selling costs
	[$1,120,000 / (70 + 70)] x 70 for JIT or x 70 for Non-JIT	$560,000	$560,000
	Service costs
	[$1,050,000 / (350 + 175)] x 350 for JIT or x 175 for Non-JIT	$700,000	$350,000
	Total	$4,150,909	$1,199,091