Question

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. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $705 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,100 each. Delivery costs vary from store to store, averaging $0.58 per unit.

Jorell charges the chain store $15.70 per labeler and the independent office supply stores $19.20 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.)
No , the cost differential of $ does not  justify the price differential of $3.50.

Answer 1

Answer
CALCULATION OF COST DIFFERENCES BETWEEN THE 2 POLICIES :
PARTICULARS	CHAIN STORES	SMALL RETAIL STORES
Sales salaries	$            1,06,800	$                 3,28,800
Delivery cost	$               54,990	$                 1,58,340
	(117000 units/1500)*$705	(273000 units * $0.58)
Total cost (other than variable)	$            1,61,790	$                 4,87,140
No. of units	1,17,000	2,73,000
Cost per unit	1.383 / Unit	1.784 / Unit
Variable cost per unit	13.50 /Unit	13.50 /Unit
Total cost	14.883 per unit	15.284 per Unit
Above working clearly shows the difference of $0.401 per unit in variable cost computed with 2 different method. However, Selling price , difference of $ 3.5 in 2 pricing policy.
No. the Cost differential $0.401 does not justify price differential of $3.5