Stuart’s Branded Foods is not competitive in the market. Is there a different way that can be used to estimate the cost of services and products to the customers, such that the company can become competitive? Use the data about the two customers to demonstrate your proposal and calculate what would be the selling price per kit or per cup for each customer.
The traditional pricing approach is not appropriate to figure out the cost structure in this case. With 23% and 12% margin, the weighted average margin cannot be 5% margin. Mathematically, the net margin should be more than 12% as long as the margin rate is right. To figure out an exact cost structure, we can consider adopting activity-based costing system(ABC system). ABC system involves four steps. They are: 1. Identifying the major activities that take place in an organization; 2. Assigning costs to cost pools/cost center for each activity; 3. Determining the cost driver for each major activity; 4. Assigning the cost of activities to products according to the product’s demand for activities. Assumption : The company’s delivery capacity is 2,714 a year. Transactions Selling price($) Small office 2,000 222.08 Restaurant 714 777.28 Total 2,714 1,000,000 The illustration of cost assignment with an ABC system Present Production activities Roasting Administration activities Purchasing invoice Research & Marketing Procurement activities Equipment Depreciation in equipment Delivery 70,000 Depreciation in vehicle Procurement activities Other overhead 70,000 70,000 Number of kits 27,777 $ 2.52 per kit 10,000 90,000 80,000 10,000 60,000 Number of kits Number of kits Number of deliveries Number of deliveries 27,777 27,777 2,714 2,714 $ $ 2.88 0.36 per kit per kit per delivery per delivery 220,000 20,000 100,000 100,000 Number of purchasing Number of invoices Number of kits 27,777 18,000 27,777 $ $ $ 0.72 5.56 3.60 per kit per invoice per kit 500,000 500,000 Number of kits 27,777 $ 18.00 per kit ABC system...
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