Question

Price Discrimination, Customer Costs

Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 400,000 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	$9.35
Direct labor	2.65
Overhead	3.55
Total	$15.55

Jorell has two salespeople assigned to the chain store account at a cost of $51,900 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 $39,900 each. Delivery costs vary from store to store, averaging $0.57 per unit.

Jorell charges the chain store $17.95 per labeler and the independent office supply stores $21.20 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 $3.25.

Answer 1

CALCULATION OF COST DIFFERENCES BETWEEN THE 2 POLICIES :
PARTICULARS	CHAIN STORES	SMALL RETAIL STORES
Sales salaries	103800	319200
Delivery cost	56400	159600
	(120000units/1500)*$705	(280000units * $0.57)
Total cost (other than variable)	160200	478800
No. of units	120000	280000
Cost per unit	1.335 / Unit	1.71/ Unit
Variable cost per unit	15.55 /Unit	15.55 /Unit
Total cost	16.885 per unit	17.26 per Unit
Above working clearly shows the difference of $0.375 per unit in variable cost computed with 2 different method. However, Selling price , diffeence of $ 3.25 in 2 pricing policy. No. the Cost differential $0.375 does not justify price differential of $3,25