ACTIVITY-BASED CUSTOMER-DRIVEN COSTS Suppose that Stillwater Designs has two classes of distributors: JIT distributors and nonJIT 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:

. 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.

. 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).

. 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?

Exercise