ACTIVITY-BASED CUSTOMER-DRIVEN COSTS
Suppose that Stillwater Designs has two classes of distributors: JIT distributors and non- JIT distributors. The JIT distributor places small, frequent orders, and the non-JIT distributor tends to place larger, less frequent orders. Both types of distributors are buying the same product. Stillwater Designs provides the following information about customer-related activities and costs for the most recent quarter:
| |
JIT-Distributors |
Non-JIT Distributors |
|
Sales orders
|
200
|
20
|
|
Sales calls
|
20
|
20
|
|
Service calls
|
100
|
50
|
|
Average order size
|
500
|
5,000
|
|
Manufacturing cost/unit
|
$100
|
$100
|
|
Customer costs:
|
|
|
|
Processing sales orders
|
$ 880,000
|
|
|
Selling goods
|
320,000
|
|
|
Servicing goods
|
300,000
|
|
|
Total
|
$1,500,000
|
|
Required:
1. Calculate the total revenues per distributor category, and assign the customer costs to each distributor type by using revenues as the allocation base. Selling price for one unit is $125.
2. Calculate the customer cost per distributor type using activity-based cost assignments. Discuss the merits of offering the non-JIT distributors a $3 price decrease (assume that they are agitating for a price concession).
3. Assume that the JIT distributors are simply imposing the frequent orders on Still-water Designs. No formal discussion has taken place between JIT customers and Stillwater Designs regarding the supply of goods on a JIT basis. The sales pattern has evolved over time. As an independent consultant, what would you suggest to Stillwater Designs' management?