Suppose that Lone Star Designs has two classes of distributors: class A distributors and class B distributors. The class A distributor places small, frequent orders, and the class B distributor tends to place larger, less frequent orders. Both types of distributors are buying the same product. Lone Star provides the following information about customer-related activities and costs for the most recent quarter:

Required:
1. 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.
2. Calculate the customer cost per distributor type using activity-based cost assignments. Discuss the merits of offering the class B distributors a $3 price decrease (assume that they are agitating for a price concession).
3. Assume that the class A distributors are simply imposing the frequent orders on Lone Star. No formal discussion has taken place between class A customers and Lone Star regarding the supply of goods on a very frequent basis. The sales pattern has evolved over time. As an independent consultant, what would you suggest to Lone Star's management?

Transcribed Image Text:

Class A Distributors Class B Distributors 1,000 100 Sales orders 100 Sales calls 100 Service calls 250 500 Average order size Manufacturing cost/unit Customer costs: Processing sales orders Selling goods Servicing goods 2,500 25,000 $100 $100 $4,400,000 1,600,000 1,500,000 $7,500,000 Total