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Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 340,000 units. A large chain store purchases about 30 percent of Jorell’s production. Several thousand independent retail office supply stores purchase the other 70 percent. Jorell incurs the following costs of production per labeler: Jorell has two salespeople assigned to the chain store account at a cost of $55,000 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $750 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,000 each. Delivery costs vary from store to store, averaging $0.60 per unit. Jorell charges the chain store $16.50 per labeler and the independent office supply stores $20 per labeler. Required: Is Jorell’s pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevant calculations. (Round unit costs to the nearest cent.)

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 18, Problem 26P
Textbook Problem
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Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers averages 340,000 units. A large chain store purchases about 30 percent of Jorell’s production. Several thousand independent retail office supply stores purchase the other 70 percent. Jorell incurs the following costs of production per labeler:

Chapter 18, Problem 26P, Jorell, Inc., manufactures and distributes a variety of labelers. Annual production of labelers

Jorell has two salespeople assigned to the chain store account at a cost of $55,000 each per year. Delivery is made in 1,500 unit batches about three times a month at a delivery cost of $750 per batch. Eight salespeople service the remaining accounts. They call on the stores and incur salary and mileage expenses of approximately $41,000 each. Delivery costs vary from store to store, averaging $0.60 per unit.

Jorell charges the chain store $16.50 per labeler and the independent office supply stores $20 per labeler.

Required:

Is Jorell’s pricing policy supported by cost differences in serving the two different classes of customer? Support your answer with relevant calculations. (Round unit costs to the nearest cent.)

To determine

Explain whether Incorporation J’s pricing policy is supported by cost differences in serving the two different classes of customer.

Explanation of Solution

Determine the chain store costs:

ParticularsChain store
Sales salaries$110,000
Delivery cost ($102,0001,500 units×$750)$51,000
Total costs$161,000
Number of units (30% of $340,000)102,000
Cost per unit$1.58 per unit

Table (1)

Note: In chain store, the delivery is made in 1,500 unit batches, and the delivery cost is $750 per batch

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Chapter 18 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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