Tranax Company sells machine parts to industrial equipment manufacturers by bidding cost plus 40 percent, where cost is defined as manufacturing cost plus order processing cost. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Cost and sales information by customer category is provided below.

Order-filling capacity is purchased in steps (order-processing clerks) of 1,000, each step costing $50,000; variable order-filling activity costs are $40 per order. The activity capacity is 28,000 orders; thus, the total order-filling cost is $2,500,000 [(28 steps Xx $50,000) + ($40 X 27,500)]. Current practice allocates ordering cost in proportion to the units purchased.
Tranax recently lost a bid for 100 units. (The per-unit bid price was $2 per unit more than the winning bid.) The manager of Tranax was worried that this was a recurring trend for the larger orders. (Other large orders had been lost with similar margins of loss.) No such problem was taking place for the smaller orders; the company rarely lost bids on smaller orders.
Required:
1. Calculate the unit bid price offered to Tranax’s customers assuming that orderfilling cost is allocated to each customer category in proportion to units sold.
2. Assume that a newly implemented ABC system concludes that the number of orders placed is the best cost driver for the order-filling activity. Assign order-filling costs using this driver to each customer type and then calculate the new unit bid price for each customer type. Using this new price, would Tranax have won the bid for the 100 units recently lost?
3. What if Tranax offers a discount for orders of 25 units or more to the frequently ordering customers? Assume that all the frequently ordering customers can and do take advantage of this offer at the minimum level possible. Can Tranax offer the original price from Requirement 1 to the frequently ordering customers and not decrease its profitability?

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Sales orders Order size Average unit manufacturing cost Order-processing activity costs: Processing sales orders Frequently Ordering Customers 25,000 Less Frequently Ordering Customers 2,500 10 100 $40 $40 $2,500,000