The Mittelberg Paper Company purchases large rolls of paper from paper manufacturers. The company then cuts and packages the paper to meet the demand of small printing companies. The company uses ABC to determine the cost of the product and then charges the printing companies an additional 20 percent for profit. The price calculation for a recent order looked like the following: Activity Application Rate Usage of Cost Driver Cost Cutting £5/cut 30 cuts £ 150 Packaging £1/package 200 packages 200 Storing £0.60/package 200 packages 120 178 Delivery £4/kilometer 10 kilometers 40 £40/order 1 order Administration 40 Total activity costs £ 540 Raw materials 300 Total cost £ 840 Profit (0.20)(£840) 168 Price £1,008 The customer is not happy with the price and threatens to change suppliers. How should the Mittelberg Company re-examine its activities, the relation with its customer, and its pricing process?
The Mittelberg Paper Company purchases large rolls of paper from paper manufacturers. The company then cuts and packages the paper to meet the demand of small printing companies. The company uses ABC to determine the cost of the product and then charges the printing companies an additional 20 percent for profit. The price calculation for a recent order looked like the following: Activity Application Rate Usage of Cost Driver Cost Cutting £5/cut 30 cuts £ 150 Packaging £1/package 200 packages 200 Storing £0.60/package 200 packages 120 178 Delivery £4/kilometer 10 kilometers 40 £40/order 1 order Administration 40 Total activity costs £ 540 Raw materials 300 Total cost £ 840 Profit (0.20)(£840) 168 Price £1,008 The customer is not happy with the price and threatens to change suppliers. How should the Mittelberg Company re-examine its activities, the relation with its customer, and its pricing process?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:AIP 4.12 Pricing and Activity-Based Costing LO 1, 2, 9
The Mittelberg Paper Company purchases large rolls of paper from paper
manufacturers. The company then cuts and packages the paper to meet the demand of
small printing companies. The company uses ABC to determine the cost of the product
and then charges the printing companies an additional 20 percent for profit. The price
calculation for a recent order looked like the following:
Activity
Application Rate
Usage of Cost Driver
Cost
Cutting
£5/cut
£ 150
30 cuts
Packaging
£1/package
200 packages
200
Storing
£0.60/package
200 packages
120
178
Delivery
£4/kilometer
10 kilometers
40
Administration
£40/order
1 order
40
Total activity costs
£ 540
Raw materials
300
Total cost
£ 840
Profit (0.20)(£840)
168
Price
£1,008
The customer is not happy with the price and threatens to change suppliers.
How should the Mittelberg Company re-examine its activities, the relation with its
customer, and its pricing process?
Expert Solution
Step 1
In order to price the product appropriately, the organization should reevaluate its activities. The Organization should recalculate its overall costs of the activity. Delivery and administration expenses need not be counted in the overall activity costs, since these tasks do not explicitly relate to the finishing of the goods at the manufacturing site. The organization also charges profits on these sums by adding these amounts to the gross cost of the activity.
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