Exercise - Activity-Based Pricing
For the coming year, Triumph Corporation has hold Julius Company that it will be switched to an activity-based pricing system or it will be dropped as a customer. In addition to regular prices, Julius will be required to pay:
Order processing (per order) $11
Additional handling costs if order marked rush (per order) $19
Technical support calls (per call) $21
Required
a. Calculate the profitability of the Julius Company account if activity is the same as in the prior year.
b. Is it realistic to expect Julius Company's activity to be the same this year as the previous year if activity-based pricing is instituted? How might Julius Company react to the new pricing scheme? How might its order behavior change as a result of the new fees?