Grundvig Manufacturing produces several types of bolts used in aircrafts. The bolts are produced in batches and grouped into three product families. Because the product families are used in different kinds of aircraft, customers also can be grouped into three categories, corresponding to the product family that they purchase. The number of units sold to each customer class is the same. The selling prices for the three product families range from $0.50 to $0.80 per unit. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual customer groups. These costs are not trivial and totaled $9,000,000 for the most recent year. Recently, the company started emphasizing a cost reduction strategy with an emphasis on creating a competitive advantage.

Upon investigation, management discovered that order-filling costs were driven by the number of customer orders processed with the following cost behavior:

Step-fixed cost component: $50,000 per step (2,000 orders define a step)*

Variable cost component: $20 per order

* Grundvig currently has sufficient steps to process 200,000 orders.

The expected customer orders for the year total 200,000. The expected usage of the order-filling activity and the average size of an order by customer category follow:

	Category I		Category II		Category III
Number of orders	100,000		60,000		40,000
Average order size	600		1,000		1,500

As a result of cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The charge was implemented by adding the cost per order to the price of each order (computed by using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and was eliminated as the order size reached 2,000 units. Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units.

Required:

1. Grundvig traditionally has expensed order-filling costs. What is the most likely reason for this practice?

GAAP mandates that all nonmanufacturing costs be expensed during the period in which they are incurred. IFRS mandates that all non manufacturing costs be expensed during the period in which they are incurred.Order filing costs are not very material costs. So, they are expensed during the period they are incurred.The company should not expense the order-filling cost.GAAP mandates that all nonmanufacturing costs be expensed during the period in which they are incurred.

2. Calculate the cost per order for each customer category. Round your answers to the nearest cent.

Category I	$fill in the blank 2 per unit
Category II	$fill in the blank 3 per unit
Category III	$fill in the blank 4 per unit

3a. Conceptual Connection: Calculate the reduction in order-filling costs produced by the change in pricing strategy (assume that resource spending is reduced as much as possible and that the total units sold remain unchanged). Enter amount as a positive number. $fill in the blank 5

3b. Explain how exploiting customer activity information produced this cost reduction. Would any other internal activities benefit from this pricing strategy?

The information revealed that by charging for the benefit, the customers increased the order size thereby bringing down the order processing costs, scheduling and setup costs.The information revealed that by reducing the manufacturing cost the customers placed larger orders thereby increasing the sales.The information revealed that by decreasing the sale price the demand for the product increased and thereby increasing the sales.The information revealed that by charging for the benefit, the customers increased the order size thereby bringing down the order processing costs, scheduling and setup costs.