Response to the following problem:
Carbon Company has two classes of customers: JIT firms and non-JIT firms. The JIT customer places small, frequent orders, and the non-JIT customer tends to place larger, less frequent orders. Both types of customer are buying the same product. Carbon charges a 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 Carbon. Both customer types generated the same sales in units, so Carbon's management had assumed that the customer support costs were about the same and priced the goods the same for each customer. Carbon 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 $3 per unit less than Carbon's price. This customer wanted a price concession. Willis Johnson, a recently hired cost accountant, suggested that the problem may have to do with unfair cost assignments and suggested that customer costs be assigned to each customer category using activity-based costing. He collected the following information about customer-related activities and costs for the most recent quarter:
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JIT Customers
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Non-JIT Customers
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|
Sales orders
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400
|
40
|
|
Sales Calls
|
40
|
40
|
|
Service Calls
|
200
|
100
|
|
Average order size
|
500
|
5000
|
|
Manufacturing cost/unit
|
100
|
100
|
|
Customer Costs:
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|
|
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Processing sales orders
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1760000
|
|
|
Selling goods
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640000
|
|
|
Purchasing goods
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600000
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|
|
Total
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$ 3000000
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|
Required
1. Calculate the total revenues per customer category and assign the customer costs to each customer type using revenues as the allocation base.
2. Calculate the customer cost per customer type using activity-based costing assignments. Discuss the merits of offering the non-JIT customers a $3 price decrease.
3. Assume that the JIT customers are simply imposing the frequent orders on Carbon Company. The JIT customers and Carbon have never formally discussed the supply of goods on a just-in-time basis. The sales pattern has simply evolved over time. As an independent consultant, what would you suggest to Carbon's management?