Reference no: EM13938952

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?