Case Study 2:

Mike the Bike Company produces mountain bikes and sells them to its commercial customers, which are 20 retail outlets. Of the 20 retail outlets, 19 commercial customers are small bike shops, which are owned separately and one (1) large retail chain with numerous retail outlet stores.

The retail chain central purchasing buys 60% of the bicycles produced by Mike the Bike Company, which are warehoused centrally and distributed to its outlets at the large retail chains expense. The 19 smaller commercial customers purchase bicycles in approximately equal quantities and their orders are about the same size.

Currently, customer-driven costs are assigned to customers based on units sold. You have been appointed the management accountant at Mike the Bike. Data concerning Mike the Bikes customer activities are as follows:

	Large Retailer Chain	Smaller Retailers
Units purchased	27,000	18,000
Orders placed	12	1,200
Number of sales calls	6	294
Manufacturing costs	$10,800,000	$7,200,000
Order filling costs allocated*	$ 484,800	$323,200
Sales force costs allocated*	$ 240,000	$160,000

*Currently allocated on sales volume (number of units sold).

REQUIRED:

1. Assign manufacturing, ordering and selling costs to the two customers group (large retailer and small retailers) using the traditional units sold allocation basis and then calculate the total cost per bicycle for each customers group, using this unit-level driver.

2. Assign manufacturing, ordering and selling costs to the two customer groups by using an ABM allocation basis. Round activity rates and activity costs to the nearest cent (2 decimal places). Calculate the total cost per bike for each customer group.

3. Compare your answer from requirement 1 and 2. Comment on the accuracy and usefulness of the different costs per bike for each customer group for strategic decision-making.

4. Mike the Bikes manufacturing competitor offered an 8% discount off the current selling price of its product, which is similar to the Mike the Bike bicycles. Assume Mike the Bike has calculated its selling price using a total cost plus 10% mark-up on the total cost per bike calculated in requirement 1. What strategic pricing decision may be made (from the information in requirements 1, 2, and 3) to offer a new selling price to retain the business of the large retail chain?