Question

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. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $690 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $40,900 each. Delivery costs vary from store to store, averaging $0.57 per unit.

Jorell charges the chain store $17.25 per labeler and the independent office supply stores $20.30 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 $3.05.

Answer 1

Answer:	Computation of cost per unit
		Chain Store		Independent retail supply
	Direct material	$                             9.20		$                  9.20
	Direct labor	$                             2.80		$                  2.80
	Overhead	$                             3.15		$                  3.15
	Sales person salaries	$                             0.81	(53100*2)/(435000*30%)	$                  1.07	(40900*8)/(435000*70%)
	Delivery charges	$                             0.46	($690/1,500)	$                  0.57
		$                           16.42		$                16.79
	Difference in cost	$                             0.37	($16.79-16.42)
	No , the cost differential of $0.37 does not justify the price differential of $3.05.