Problem - Triumph Corporation has told 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 cost if order marked rush (per order) $20
Technical support calls (per call) $21
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?
Additional Info needed:
Order processing cost per order $9
Additional cost if order must be expedited (rushed) $11
Customer technical support calls (per call) $13
Relationship management cost (per customer per year) $1800
In addition to these cost, product cost amount to 80% of sales. In the prior year, Triumph had the following experience with one of its customers, Julius Company:
Sales $22,000
Number of orders 170
Percent of orders marked rush 80%
Calls to technical support 90
Good Earth Products produce orange juice and candied orange peels. A 1,000 pound batch of oranges Costing $500 is transformed used labor $50 into 100 pounds of orange peels and 300 pints of juice. The company has determined that the sales value of 100 pounds of peels at the split off point is $350, and value of the pint of juice (not pasteurized or bottled) is $0.40. Beyond the split-off point, the cost of sugar coating and packaging the 100 pounds of peels is $60. The cost of pasteurizing and packaging the 300 pints of juice is $250. A 100 pound box of candied peels is sold to commercial banking companies for $600. Each pint of Juice is sold for $1.75.
Required:
A) Allocate joint costs using the relative sales values at the split off point and calculate the profit per 100 pound box of sugar coated peels and the profit per pint of juice.
B) What is the incremental benefit (Cost) to the company of sugar coating the peels rather than selling them in their condition at the slit off point?
C) What is the incremental benefits (costs) to the company of pasteurizing and packaging a pint of juice rather than selling the juice at the split-off point?