QUESTION 4 (20 Marks)

Emery Company has two classes of customers:JIT firms and non-JIT firms.The JIT customer category places small, frequent orders, and the non-JIT customer category tends to place larger, less frequent orders.Both types of customer are buying the same product.Emery charges manufacturing cost plus 25 percent for a given order.The 25 percent markup is set large enough to cover nonmanufacturing costs and provide a reasonable return for Emery.Both customer types generated the same sales in units and so Emery's management had assumed that the customer support costs were about the same and priced the goods the same for each customer.Emery recently received some complaints from some of the non-JIT customers.Several of these customers are threatening to take their business to other suppliers who allegedly charge less.For example, one customer said that he could buy the same 5,000 units from a competitor for $3 per unit less than Emery's price.This customer wanted a price concession.

A new cost accountant recently hired said that the problem may have to do with inappropriate cost assignments and suggested that customer costs be assigned to each customer category using activity-based costing.She collected the following information about customer-related activities and costs for the most recent quarter:

JIT Customers

Non-JIT Customers

Sales orders

200

20

Sales calls

20

20

Services 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:

a)Calculate the total revenues per customer category and assign the customer costs to each customer type using revenues as the allocation base.