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Achmad Faizal Azmi (361160) 6-32 a. How did Jergens, Inc., use an activity-based costing approach to justify the price for an order of odd-size metal locating fasteners? Jergens’ president determine the price on what he estimated to be the cost of producing the order of 10 odd-sized fasteners from scratch. Setup for the odd size and overtime labor were included in this cost. Basically, the company produced the odd-sized fasteners by producing full-size fasteners and then shortening 10. This technique was less costly than setting up the gear to run a little group of the required odd size. b. What issues arose in Goodyear Tire & Rubber’s pricing to distributors? What was Goodyear’s response? Goodyear had been rewarding its sales force based on volume. This method will provide an incentive for the sales force to strongly discount prices to large distributors. The discounts were so substantial that the large distributors could resell the tires to smaller distributors (even with transportation costs to other regions). Consequently, this method decrease Goodyear’s sales at higher prices to smaller distributors. Then,

Goodyear respond to this bad situation by

decreasing the discounts to large distributors, omiting discount approval authority from the sales force and transferring it to a tactical pricing group which decide whether Goodyear can profitably match a competitor’s prices. Moreover, Goodyear also adjust its sales force bonus scheme to include a revenue per tire metric. c. What was the outcome of Emerson Electric’s decision to depart from cost-based pricing? How can a product costing system contribute to undercosting a low-volume or customized product? Emerson discovered that customers were willing to pay about 20% higher than Emerson’s initially proposed cost-based price of $2,650 for a new compact sensor. Emerson set price of the sensor at $3,150. As we can see, the traditional volume-based cost system tends to overcost high-volume standard/basic products, while undercosting low-volume products. On the other hand, the activity-based costing system give more accurate reflection of the costs involved with producing a wider range of products and assigning cost based on the actual use of resources.

d. How did Wildeck influence customers to purchase products and services that are more profitable to Wildeck? How did Wildeck respond to a competitor’s lower priced storage-rack protector? What role should a cost system play in such decisions?

Wildeck decided to downplay its parts catalog and more-heavily promote packages in which it also installs its products and in which it collects more for the parts it provides. In response to a competitor’s lower priced storage rack protector, Wildeck introduced a “lite” version of its protectors that sold for much less than the competitor’s protector. When customers called about purchasing the lite version, they were informed of the benefits of the original version, and most of these customers bought the original version. The majority of customers who originally inquired about the “lite” version ended up buying the originals. A cost system should play a principal role in such decisions. An accurate costing system, such as a good activity-based costing system that includes both manufacturing and nonmanufacturing costs of providing goods and services to customers, provides reasonably precise information to managers for making decisions about the mix of products and services to offer to customers and prices to charge in order to generate the desired level of profitability.

e. Why was Union Pacific not concerned if it lost its less profitable customers? Will dropping unprofitable customers always lead to an immediate increase in profit?

Union Pacific started instituting a minimum price higher than the lowest third of its customers paid. The company was not concerned if it lost these customers because customers who were paying higher prices would fill up the newly free space. Dropping unprofitable customers will not always lead to an immediate increase in profit, especially if the associated capacity related costs are fixed/committed and the resources cannot be put to other uses.