Larsen, Inc., manufactures and distributes a variety of health products, including Velcro fastened wrist stabilizers for people with carpal tunnel syndrome. Annual production of wrist stabilizers averages 200,000 units. A large chain store purchases about 40 percent of Larsen’s production. Several thousand independent retail drugstores and medical supply stores purchase the other 60 percent. Larsen incurs the following costs of production per box:

Direct materials ....$2.20

Direct labor ......1.05

Overhead ......0.75

Total .........$4.00

Larsen has one salesperson assigned to the chain store account at a cost of $65,600 per year. Delivery is made in 1,000 unit batches about three times a month at a delivery cost of $600 per batch. Four 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 $0.45 per unit. Larsen charges the chain store $6.25 per box and the independent stores $6.50 per box.

Required:

Is Larsen’s pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevant calculations.