Question

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. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $720 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,600 each. Delivery costs vary from store to store, averaging $0.57 per unit.

Jorell charges the chain store $16.45 per labeler and the independent office supply stores $19.90 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 $3.45.

Answer 1

Answer
Cost of labeler for two different class of customer
	Large Chain Store	Retail office supply store	Differential
Sales Price	$           16.45	$                  19.90	$      -3.45
Direct cost	$           14.30	$                  14.30	$           -
Sales person salary per unit	$           0.969	$                  1.340	$    -0.371
Delivery expenses	$           0.480	$                  0.570	$    -0.090
Total Unit Cost	$         15.749	$                16.210	$    -0.461
Margin per unit	$           0.701	$                  3.690	$    -2.989
No, the cost differential of $0.461 does not justify the price differential of $3.45

Working note:
Sales person assigned to chain store	2
Salary each person	$         51,600
Total salary expense	$      1,03,200
Number of units sold to chain store (355000 x 30%)	$      1,06,500
Cost per unit	0.969
Sales person assigned to retail store	8
Salary each person	$         41,600
Total salary expense	$      3,32,800
Number of units sold to chain store (355000 x 70%)	$      2,48,500
Cost per unit	1.34
Delivery expense
Delivery expense per batch	$              720
Number of units per batch	$           1,500
Delivery expense per unit	0.48
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