Question

In: Accounting

Problem 18.26 - Price Discrimination, Customer Costs Jorvell, Inc. maufactures and distributes a variety of labelers....

Problem 18.26 - Price Discrimination, Customer Costs
Jorvell, Inc. maufactures and distributes a variety of labelers. Annual production of labelers averages 340,000 units. A large chain store purchases about 30% of Jorell's procution. Several thousand independent retail office supply stores purchase the other 70%. Jorell incurs the following costs of production per labeler:
Direct materials $             8.90
Direct labor $             2.40
Overhead $             3.20
Total $         (14.50)
Jorell has two salespeople assigned to the chain store at a cost of $55,000 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $750 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,000 each. Delivery costs vary from store to strore, averaging $0.60 per unit.
Jorell charges the chain store $16.50 per labeler and the independent office supply stores $20 per labeler.
Required:
Is Jorells pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevent calculations. (Round unit costs to the nearest cent.)
Chain Store Costs: Small Retail Store Costs:
Sales salaries $                110,000 Sales support $            328,000
Delivery cost Delivery cost
Total Total
Number of units Number of units
Cost per unit Cost per unit
Is the pricing policy supported by cost differences in serving the two different classes of customer?

Solutions

Expert Solution

1. CALCULATION OF COST DIFFERENCES BETWEEN THE 2 POLICIES :

PARTICULARS CHAIN STORES SMALL RETAIL STORES
Sales salaries $110000 $328000
Delivery cost $51000 $142800
(102000units/1500)*$750 (238000units * $0.60)
Total cost (other than variable) $161000 $470800
No. of units 102000 238000
Cost per unit $1.58 per unit $1.98 per unit
Variable cost per unit $14.50 $14.50
Total cost $ 16.08 per unit $16.48 per unit

Thus, clearly, there exist cost differences in serving the two different classes of customer. But the difference in cost of both the units is $0.40 whereas the difference in Selling price is $3.50 per unit more for small retail stores and offices.

Since the cost to the company for small stores is more, therefore, the differential pricing policy is justified . Also, it is evident that the margin of profit that the company earns from outside stores is much more than the profit it earns through the chain stores. Hence, for higher profits, the pricing policy is justified to some extent.

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of...
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 425,000 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 $9.15 Direct labor 2.05 Overhead 3.60   Total $14.80 Jorell has two salespeople assigned to the chain store account at a cost of $55,100 each per year....
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of...
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 435,000 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 $9.20 Direct labor 2.80 Overhead 3.15   Total $15.15 Jorell has two salespeople assigned to the chain store account at a cost of $53,100 each per year....
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of...
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....
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of...
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 355,000 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 $8.25 Direct labor 2.95 Overhead 3.10   Total $14.30 Jorell has two salespeople assigned to the chain store account at a cost of $51,600 each per year....
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of...
Price Discrimination, Customer Costs Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 390,000 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 $8.40 Direct labor 2.00 Overhead 3.10   Total $13.50 Jorell has two salespeople assigned to the chain store account at a cost of $53,400 each per year....
The Alpha Dog Company manufactures and distributes a variety of pet-related products. In response to customer...
The Alpha Dog Company manufactures and distributes a variety of pet-related products. In response to customer feedback relating to the fragile nature of many commercially available dog leashes, the company’s product development team has recently introduced a prototype of a new, virtually indestructible dog leash. The development of the prototype cost $250,000 in research and development costs. The product development team has presented their proposal to Adam Smith, the company’s president and CEO. Adam has asked you, as the chief...
The three types of discrimination in labor markets: employer discrimination, employee discrimination and customer discrimination. There...
The three types of discrimination in labor markets: employer discrimination, employee discrimination and customer discrimination. There is an assertion that in competitive markets, each type of discrimination is costly to engage in. Demonstrate and discuss why.
Which of the following is an example of price discrimination? a)It costs more to make a...
Which of the following is an example of price discrimination? a)It costs more to make a long-distance phone call during the day than it does late at night. b)A ticket to the zoo costs less for a child than it does for an adult. c)Regular gasoline costs less than premium gasoline. d)All of the above are examples of price discrimination.
4. Define first degree price discrimination, second degree price discrimination, and third degree price discrimination. Provide...
4. Define first degree price discrimination, second degree price discrimination, and third degree price discrimination. Provide an example of each.
Price discrimination is designed to:
SUBJECT: GAME THEORY QUESTION: Price discrimination is designed to; A) Extract surplus from consumers who are most willing to pay for the good B) Raise profits by charging all consumers more than they would without price discrimination. C) Raise profits by allowing some consumer to pay less and therefore become more loyal. D) None of the above.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT