Stuart Daw questions

1.
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

Operational costs
PERSONNEL COST
VEHICLE COST
OTHER COSTS

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

--No of invoices

EQUIPMENT COST

$ 90,000

NO OF KITS

Costs per kit/invoice

$ 5,00,000/27,777
= $ 18
--$ 3,60,000/18,000
= $ 20

$ 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
CUP

SINGLE KIT
$ 18 X 1 = $ 18
$ 3.240 X 1 = $ $ 3.240
$ 20 X 1 = $ 20
= $ 41.240
$ 6.186

25 KIT
$ 18 X 25 = $ 450
$ 3.240 X 20 = $ 64.8
$ 20 X 1 = $ 20
= $ 534.8
$ 93.72

$ 47.426

$ 629.1764

$ 47.426

$ 629.1764/25= $ 25.167

$ 47.426/ 500 = $.0948

$ 25.167/ 500 = $.05033

Its 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.
FURTHER The comparison of Selling Price /kit and Cost for customers/cup for
both Small and Large Customers is given below:

COST OF COFFEE
EQIPMENT COST
Operational costs
TOTAL COST
PROFIT MARGIN @
15%
TOTAL
SELLING
PRICE
SELLING PRICE PER
KIT
CUSTOMER COST PER
CUP

SMALL CUSTOMER ( 5 KITS)

$ 18 X 5 = $ 90
$ 3.240 X 5 = $ 16.20
$ 20 X 1 = $ 20
= $ 136.20
$ 20.43

LARGE CUSTOMER ( 20 KITS)

$ 18 X 20 = $ 360
$ 3.240 X 20 = $ 64.8
$ 20 X 1 = $ 20
= $ 444.8
$ 66.72

$ 156.63

$ 511.52

$ 156.63/5 = $ 31.326

$ 511.52/20= $ 25.576

$ 31.326 / 500 = $.06265

$ 25.576/ 500 = $.0511

The smaller customer has to pay more as compared to the large customer, its
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.
UNDER THIS METHOD ALSO THE COST PER CUP IS COMING DOWN FOR
BOTH THE CUSTOMERS IRRESPECTIVE OF THE SIZE.
FOR THE SMALL CUSTOMER IT IS DOWN FROM A HIGH OF $.088 TO $ .0626
AND FOR THE LARGE CUSTOMER IT IS DOWN FROM $.078 TO $ .0511.
THE ASSUMPTION IS MAKING ONE INVOICE PER ORDER AND THE NO OF INVOICE WILL VARY ACCORDING TO
THE NO OF INVOICES.