Stuart Daw questions 1. 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 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: COGS Total costs $ 5,00,000 Basis of allocation No of kits --No of invoices Costs per kit/invoice $ 5,00,000/27,777 = $ 18 --$ 3,60,000/18,000 = $ 20

Operational costs PERSONNEL COST VEHICLE COST OTHER COSTS EQUIPMENT COST

--$ 2,20,000 $ 70,000 $ 70,000 $ 90,000

NO OF KITS

$ 90,000/27,777 =$ 3.240

PRICE OF ORDERING 25 KITS AND A SINGLE KIT. COST OF COFFEE EQIPMENT COST Operational costs TOTAL COST PROFIT MARGIN @ 15% TOTAL SELLING PRICE SELLING PRICE PER KIT CUSTOMER COST PER SINGLE KIT $ 18 X 1 = $ 18 $ 3.240 X 1 = $ $ 3.240 $ 20 X 1 = $ 20 = $ 41.240 $ 6.186 $ 47.426 $ 47.426 $ 47.426/ 500 = $.0948 25 KIT $ 18 X 25 = $ 450 $ 3.240 X 20 = $ 64.8 $ 20 X 1 = $ 20 = $ 534.8 $ 93.72 $ 629.1764 $ 629.1764/25= $ 25.167 $ 25.167/ 500 = $.05033

If your pricing strategy is accepted by Stuart’s Branded Foods.52/20= $ 25.20 $ 20 X 1 = $ 20 = $ 136.088 TO $ . UNDER THIS METHOD ALSO THE COST PER CUP IS COMING DOWN FOR BOTH THE CUSTOMERS IRRESPECTIVE OF THE SIZE.CUP It’s apparent from the above calculations that customers ordering in bulk can obtain significant discount in the prices.0511. The price of ordering 25 kits is almost half of that of ordering 1 kit at a time.240 X 5 = $ 16. FOR THE SMALL CUSTOMER IT IS DOWN FROM A HIGH OF $.576/ 500 = $.078 for large customers.088 for small and $.52 $ 511. but with different profit margins.63 $ 156.240 X 20 = $ 64.078 TO $ .8 $ 66.8 $ 20 X 1 = $ 20 = $ 444. in spite of Stuart Daw maintaining a 15% markup on its Profit Margin. THE ASSUMPTION IS MAKING ONE INVOICE PER ORDER AND THE NO OF INVOICE WILL VARY ACCORDING TO THE NO OF INVOICES.326 / 500 = $. The cost per cup was almost similar for both customers in the old pricing model: $. 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.326 $ 31.0511 COST OF COFFEE EQIPMENT COST Operational costs TOTAL COST PROFIT MARGIN @ 15% TOTAL SELLING PRICE SELLING PRICE PER KIT CUSTOMER COST PER CUP The smaller customer has to pay more as compared to the large customer.20 $ 20. what impact will it have on the performance of the business? What impact might it have upon the business strategy of the firm? . whereas in the new pricing model Stuart Daw may achieve a profit margin of 15% for both large and small customers.43 $ 156.0626 AND FOR THE LARGE CUSTOMER IT IS DOWN FROM $.63/5 = $ 31. FURTHER The comparison of Selling Price /kit and Cost for customers/cup for both Small and Large Customers is given below: SMALL CUSTOMER ( 5 KITS) $ 18 X 5 = $ 90 $ 3. 2.06265 LARGE CUSTOMER ( 20 KITS) $ 18 X 20 = $ 360 $ 3.72 $ 511.576 $ 25.

15. 17.500 single kits 10.700 $ 20 X 17.569 TOTAL SELLING PRICE $ 11.500 = $ 3.000 = $ 228284 $ 40.68.17.50.27.000 customers for a total no of kits of 27. 17.500 = $ 56.628 TOTAL SALES $ 1.35 COST OF COFFEE $ 18 X 17.285. 500 customers giving the rest as bulk orders thus getting quantity discount from the company's salespersons.500 customers giving a single kit order or repeating it.67.777.644.277.059 $ 2.359 15% of sales $ 8.277= $ 1. What advice would you offer to Stuart Daw? .21.49. 3.500 = $ 3.700 TOTAL COST PROFIT MARGIN @ $ 1.84.12 NET MARGIN NET MARGIN IS 15% OF SALES WHICH IS REQUIRED BY THE COMPANY IN THIS CASE.240 X 17.17.48 $ 20 X 500= $ 10.986 $ 3. ( 27.777-17500) .000 Operational costs = $ 7.628. BY FOLLOWING THE PROPOSED STRATEGY THE COMPANY WILL BE IN APOSITION TO RESTARTEGISE AND RESET THE TOTAL REVENUE FROM A CURRENT $1MILLION TO MORE THAN $ 11. if i assume that the small no of customers is significantly large and the no of large customers are significantly smaller then the calculations would be like this. HERE THE NO OF INVOICES ARE 500 AND THE BECAUSE OF BULK ORDERS THE TOTAL KITS ARE NUMBERED AT 10.277 = $ 33297.000 EQIPMENT COST $ 3.277 bulk kits for 500 INVOICES $ 18 X 10.The company is currently invoicing 18.240 X 10.

one other thing that this company can do is to reduce the selling price or use this amount to offer more quantity discount to lure new consumers into the company's fold. this loss is included in the cost of production thereby increasing the cost of production. if a new kind of Machinery can be used then this cost of almost $ 2. . so this plan will have the dual benefit of attaining the desired net margin and reducing selling price which will give the company hope for expansion in the near future.50 ($2. approximately 12% of the raw material is wasted due to disappearance of weight because of shrinkage and further 4% is also wasted due to heavy moisture. because by resizing the total amount of revenue is increasing it may be possible to reduce the cost a little bit to face increasing competition from the market. if a new machinery is purchased then Equipment cost via depreciation is also going to increase but definitely there would be reduction in cost and thus more flexibility in pricing. it is also advisable for the daw company to reduce its wastability.35) can be reduced and thus increasing the margin further or reducing the selling price for customers.15 + $. but that again depends upon how much new customers the company can gain from the market and it is also dependent upon the fact whether the company can actually increase production a little bit to meet increase availability of spurt in orders.Stuart daw would be better of to reprice the coffee components along the line suggested above and thus able to get an estimated net margin of 15% on the amount of Net Sales.

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