Sorensen Manufacturing produces several types of bolts used in aircrafts. The bolts are produced in batches and
Question:
Upon investigation, management discovered that order-filling costs were driven by the number of customer orders processed with the following cost behavior:
Step-fixed cost component: $ 50,000 per step (2,000 orders define a step)* Variable cost component: $ 20 per order
The expected customer orders for the year total 100,000. The expected usage of the order-filling activity and the average size of an order by customer category follow:
As a result of cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The charge was implemented by adding the cost per order to the price of each order (computed by using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and was eliminated as the order size reached 2,000 units. Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units.
Required:
1. Conceptual Connection: Sorensen traditionally has expensed order-filling costs. What is the most likely reason for this practice?
2. Calculate the cost per order for each customer category.
3. Calculate the reduction in order-filling costs produced by the change in pricing strategy (assume that resource spending is reduced as much as possible and that the total units sold remain unchanged). Explain how exploiting customer activity information produced this cost reduction. Would any other internal activities benefit from this pricing strategy?
Step by Step Answer:
Cornerstones of Financial and Managerial Accounting
ISBN: 978-1111879044
2nd edition
Authors: Rich, Jeff Jones, Dan Heitger, Maryanne Mowen, Don Hansen