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Question 1
Is there a way to estimate the cost of services and product to customers such that Stuart’s Branded Foods can be competitive in their market? Use the illustrations of the two customers to demonstrate your approach. What would be the selling price per kit or per cup for each customer?
The costing approach should be based on per Transaction Basis rather than on per kit or per pound basis because of the following reasons:
• Current costs are allocated on a per kit basis, which is not an efficient cost allocation method.
• Operational costs should be same irrespective of number of kits.
• Equipment costs should be on a per kit basis as it depends on the number of kits sold.
• Operational costs including Personnel costs, Vehicle costs and Other Overhead costs should be allocated equally over the number of invoices generated in a year i.e. the number of transactions in a year.
The following table represents the Selling price per Order/Transaction involving varying numbers of kits:
It’s apparent from the above calculations that customers ordering in bulk can obtain significant discount in the prices, in spite of Stuart Daw maintaining a 15% markup on its Profit Margin. The price of ordering 25 kits is almost half of that of ordering 1 kit at a time.
The comparison of Selling Price /kit and Cost for customers/cup for both Small and Large Customers is given below:
The smaller customer has to pay more as compared to the large customer, it’s because the transaction costs which is same for both customers has to be spread over a smaller number of kits for the small customer. The cost per cup was almost similar for both customers in the old pricing model: $.088 for small and $.078 for large customers, but with different profit margins, whereas in the new pricing model Stuart Daw may achieve a profit margin of 15% for both large and small customers.
Is there a way to estimate the cost of services and product to customers such that Stuart’s Branded Foods can be competitive in their market? Use the illustrations of the two customers to demonstrate your approach. What would be the selling price per kit or per cup for each customer?
The costing approach should be based on per Transaction Basis rather than on per kit or per pound basis because of the following reasons:
• Current costs are allocated on a per kit basis, which is not an efficient cost allocation method.
• Operational costs should be same irrespective of number of kits.
• Equipment costs should be on a per kit basis as it depends on the number of kits sold.
• Operational costs including Personnel costs, Vehicle costs and Other Overhead costs should be allocated equally over the number of invoices generated in a year i.e. the number of transactions in a year.
The following table represents the Selling price per Order/Transaction involving varying numbers of kits:
It’s apparent from the above calculations that customers ordering in bulk can obtain significant discount in the prices, in spite of Stuart Daw maintaining a 15% markup on its Profit Margin. The price of ordering 25 kits is almost half of that of ordering 1 kit at a time.
The comparison of Selling Price /kit and Cost for customers/cup for both Small and Large Customers is given below:
The smaller customer has to pay more as compared to the large customer, it’s because the transaction costs which is same for both customers has to be spread over a smaller number of kits for the small customer. The cost per cup was almost similar for both customers in the old pricing model: $.088 for small and $.078 for large customers, but with different profit margins, whereas in the new pricing model Stuart Daw may achieve a profit margin of 15% for both large and small customers.