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Session 11 Solutions

Session 11 Solutions - $0.532 $0.57 Cost per bottle $53,200...

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An Example ClearWater Distribution purchases bottled water for delivery to its customers. The firm is re-evaluating its pricing for its two customers, PITA and NPITA. Currently, it charges both customers $0.60 per bottle. Below is the firm’s forecast of its monthly selling activities: 100,000 bottles 100,000 bottles Sales 100 miles 40 miles Delivery Distance 1 20 Deliveries 0 3 Sales Calls $0.50 $0.50 Cost per bottle NPITA PITA Why would ClearWater set the same price for both customers? Is uniform pricing appropriate/justified?
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Suppose that ClearWater adopted the ABC system described below to allocate selling costs: $0.01 per bottle Warehousing, Marketing and other costs $0.02 per bottle Product handling $2 per mile Deliveries $800 per call Sales calls Budgeted Allocation Rate Activity Assuming that ClearWater wants to earn a return of 10% on sales to each customer, what price (per bottle) should it charge each?
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Unformatted text preview: $0.532 $0.57 Cost per bottle $53,200 $57,000 Cost Allocation Base Cost Allocation Base 1,000 100,000 btls 1,000 100,000 btls Warehousing, mkting, etc 2,000 100,000 btls 2,000 100,000 btls Product handling 200 (1 x 100) =100 mi 1,600 (20 x 40) =800 mi Delivery – 0 calls 2,400 3 calls Sales calls $50,000 100,000 btls $50,000 100,000 btls Cost of water sold NPITA PITA First, let’s determine the costs for each customer: NPITA PITA = (1 – 0.10) $0.57 = $0.63 (1 – 0.10) $0.532 $0.59 Price per bottle Now, we can determine the appropriate selling price for each customer: From above, it appears that, by charging both customers $0.60 per bottle, ClearWater has been underpricing sales to PITA and overpricing sales to NPITA due to its failure to take customer selling and servicing costs into account....
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