Problem 18.26 - Price Discrimination, Customer Costs

Jorvell, Inc. maufactures and distributes a variety of labelers. Annual production of labelers averages 340,000 units. A large chain store purchases about 30% of Jorell's procution. Several thousand independent retail office supply stores purchase the other 70%. Jorell incurs the following costs of production per labeler:

Direct materials

$ 8.90

Direct labor

$ 2.40

Overhead

$ 3.20

Total

$ (14.50)

Jorell has two salespeople assigned to the chain store at a cost of $55,000 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $750 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,000 each. Delivery costs vary from store to strore, averaging $0.60 per unit.

Jorell charges the chain store $16.50 per labeler and the independent office supply stores $20 per labeler.

Required:

Is Jorells pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevent calculations. (Round unit costs to the nearest cent.)

Chain Store Costs:

Small Retail Store Costs:

Sales salaries

$ 110,000

Sales support

$ 328,000

Delivery cost

Delivery cost

Total

Total

Number of units

Number of units

Cost per unit

Cost per unit

Is the pricing policy supported by cost differences in serving the two different classes of customer?