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:
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 $150. Round calculations to the nearest dollar.
2. Conceptual Connection: Calculate the
customer cost per distributor type using activity-based cost
assignments. Round the interim calculations to the nearest
dollar.
For non JIT distributors by how much can the price be decreased
without affecting customer profitability? Round your answer to the
nearest cent.
$ per unit
3. Assume that the JIT distributors are simply imposing the frequent orders on Stillwater 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?
It sounds like the JIT buyers are switching their inventory carrying costs to Stillwater Designs without any significant benefit to Stillwater Designs. Stillwater Designs needs to prices to reflect the additional demands on customer support activities. Furthermore, additional may be needed to reflect the increased number of setups, purchases, and so on, that are likely occurring inside the plant. Stillwater Designs should also immediately initiate discussions with its JIT customers to begin negotiations for achieving some of the benefits that a JIT supplier should have, such as contracts. The benefits of contracting may offset most or all of the increased costs from the additional demands made on other activities.
PLEASE EXPLAIN STEP BY STEP.
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 | 800 | 80 | |
| Sales calls | 70 | 70 | |
| Service calls | 350 | 175 | |
| Average order size | 550 | 5,500 | |
| Manufacturing cost/unit | $125 | $125 | |
| Customer costs: | |||
| Processing sales orders | $3,080,000 | ||
| Selling goods | 1,120,000 | ||
| Servicing goods | 1,050,000 | ||
| Total | $5,250,000 | ||
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 $150. Round calculations to the nearest dollar.
| JIT | Non-JIT | |||
| Sales (in units) | ||||
| Sales | $ | $ | ||
| Allocation | $ | $ | ||
| JIT | Non-JIT | |||
| Ordering costs | $ | $ | ||
| Selling costs | $ | $ | ||
| Service costs | $ | $ | ||
| Total | $ | $ | ||
$ per unit
3. Assume that the JIT distributors are simply imposing the frequent orders on Stillwater 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?
It sounds like the JIT buyers are switching their inventory carrying costs to Stillwater Designs without any significant benefit to Stillwater Designs. Stillwater Designs needs to prices to reflect the additional demands on customer support activities. Furthermore, additional may be needed to reflect the increased number of setups, purchases, and so on, that are likely occurring inside the plant. Stillwater Designs should also immediately initiate discussions with its JIT customers to begin negotiations for achieving some of the benefits that a JIT supplier should have, such as contracts. The benefits of contracting may offset most or all of the increased costs from the additional demands made on other activities.
PLEASE EXPLAIN STEP BY STEP.
