Question 1 Is there a way to estimate the cost of services and product to customers such that Stuart’s Branded Foods can be competitive in their market? Use the illustrations of the two customers to demonstrate your approach. 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: It’s 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. The comparison of Selling Price /kit and Cost for customers/cup for both Small and Large Customers is given below: The smaller customer has to pay more as compared to the large customer, 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. 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 5% for both large and small customers. Stuart Daw should also consider increasing efficiency of its direct and indirect labor and reducing personnel costs. Question 2 If your pricing strategy is accepted by Stuart’s Branded Foods, what impact will it have on the performance of the business? What impact might it have upon the business strategy of the firm? If Stuart Daw adopts the Transaction based Pricing Strategy it may face the following impact On Performance: •The price per cup for both small as well as large customers is reduced. It can maintain competitiveness in the large customer segment by maintaining 15% Profit Margin. •Revenue stream generated from the customer segments may get impacted with changes in Transaction Costs and subsequently Price per Kit. •Improved cost allocation will ensure that the company can maintain competitiveness without any appreciation in costs to customers. On Strategy: •The company should target to serve the large customer base with better profit margins and also choose to serve those small customers who are willing to pay the targeted price per kit. For difficult to serve small customers alternate and cost effective means of ordering, transporting and fulfilling the orders should be sought. •Personnel costs, both direct and indirect should be brought under control. •Promote bulk orders among the small customers so that effective price/cup for small customers can be brought down. Question 3 What advice would you offer to Stuart Daw? Our advice to Stuart Daw would be: •Stuart Daw should adopt the new Transaction Cost allocation mechanism, which will enable it to remain competitive in the large customer segment. Identify small customers who will be less affected with any future rise in Transaction Costs/Kit. •Reduce costs per transaction for small customers so that there is no significant impact from any decrease of sales in this segment. •Improve ordering, transportation and order fulfillment systems for small customers, for e. g. instead of trying to match the order delivery time with the working hours of the customer, the customer can be incentivized for picking up the order from the delivery center, etc. Reduce direct and indirect labor costs which are a significant part of Operating Costs. •Any future increase in transaction prices will lead to loss of customers. In order to compensate this negative impact on sales the company should shift its focus on gaining market share by winning new larger customers. The company may face sales and margin fluctuations in the short run. But, in the long run, the more accurate pricing/costing system will ensure that the division can achieve its targeted profit margin while offering competitive prices.