AIP 4.12 Pricing and Activity-Based Costing LO 1, 2, 9The Mittelberg Paper Company purchases large rolls of paper from papermanufacturers. The company then cuts and packages the paper to meet the demand ofsmall printing companies. The company uses ABC to determine the cost of the productand then charges the printing companies an additional 20 percent for profit. The pricecalculation for a recent order looked like the following:ActivityApplication RateUsage of Cost DriverCostCutting£5/cut£ 15030 cutsPackaging£1/package200 packages200Storing£0.60/package200 packages120178Delivery£4/kilometer10 kilometers40Administration£40/order1 order40Total activity costs£ 540Raw materials300Total cost£ 840Profit (0.20)(£840)168Price£1,008The customer is not happy with the price and threatens to change suppliers.How should the Mittelberg Company re-examine its activities, the relation with itscustomer, and its pricing process?

Answered: The Mittelberg Paper Company purchases…

Financial & Managerial Accounting

14th Edition

ISBN:9781337119207

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter20: Variable Costing For Management Analysis

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Problem 20.22EX: Variable costing income statement and contribution margin analysis for a service company The actual...

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AIP 4.12 Pricing and Activity-Based Costing LO 1, 2, 9
The Mittelberg Paper Company purchases large rolls of paper from paper
manufacturers. The company then cuts and packages the paper to meet the demand of
small printing companies. The company uses ABC to determine the cost of the product
and then charges the printing companies an additional 20 percent for profit. The price
calculation for a recent order looked like the following:
Activity
Application Rate
Usage of Cost Driver
Cost
Cutting
£5/cut
£ 150
30 cuts
Packaging
£1/package
200 packages
200
Storing
£0.60/package
200 packages
120
178
Delivery
£4/kilometer
10 kilometers
40
Administration
£40/order
1 order
40
Total activity costs
£ 540
Raw materials
300
Total cost
£ 840
Profit (0.20)(£840)
168
Price
£1,008
The customer is not happy with the price and threatens to change suppliers.
How should the Mittelberg Company re-examine its activities, the relation with its
customer, and its pricing process?

Expert Solution

Step 1

In order to price the product appropriately, the organization should reevaluate its activities. The Organization should recalculate its overall costs of the activity. Delivery and administration expenses need not be counted in the overall activity costs, since these tasks do not explicitly relate to the finishing of the goods at the manufacturing site. The organization also charges profits on these sums by adding these amounts to the gross cost of the activity.

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