Question

Price Discrimination, Customer Costs

Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 440,000 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	$8.65
Direct labor	2.00
Overhead	2.90
Total	$13.55

Jorell has two salespeople assigned to the chain store account at a cost of $54,800 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $735 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $42,800 each. Delivery costs vary from store to store, averaging $0.57 per unit.

Jorell charges the chain store $15.50 per labeler and the independent office supply stores $19.10 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.)
, the cost differential of $ justify the price differential of $3.60.

Answer 1

From the workings given below , we can see that whereas the cost differential is 2.43% , the price differential is 23.23%.

The price differential cannot be justifies by looking at the cost differential.

Average annual production and sale = 440,000 units Chain store sales = 30%of 440,000 = 132,000 Retailer sales = 308,000		Chain stores	Retail Stores
Units sold	A	132000	308000
Number of sales persons	B	2	8
Average cost per person	C	54800	42800
Total Sales persons cost (B x C)	D	109600	342400
Sales persons' cost per unit (D / A)	E	0.83	1.11
Delivery cost per batch	F	735
Number of units per batch	G	1500
Cost of delivery per unit	H	0.49	0.57
Cost selling and delivery per unit (E + H)	I	1.32	1.68
Product cost per unit	J	13.55	13.55
Total cost	K	14.87	15.23
Selling Price	L	15.50	19.10
Cost diferential		0.36
Cost differential    %   (0.36/14.8)		2.43%
Price differential		3.60
Cost differential    %   (3.60/15.5)		23.23%