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Chapter 4

Q. 4.5

James Wilson, a contractor, purchases 1,000 windows annually from Clear Windows, a window manufacturer, for $120,000. The product cost of $80/window includes the cost of designing and manufacturing the windows, but does not include transportation or customer service. The cost to Clear Windows of delivering the 1,000 windows to James Wilson is $5,000. Employees at Clear Windows spend 80 hours a year taking orders, answering questions, and offering other assistance for James Wilson. The cost of using employee time is $20 per hour. What is the annual net benefit to Clear Windows of having James Wilson as a customer?

Step-by-Step

Verified Solution

The benefit of having James Wilson as a customer is the revenue generated from sales or $120,000. The costs include:

Cost of Goods Sold (1,000 windows)($80/window): $80,000
Cost of transportation: 5,000
Cost of service ($20/hour)(80 hours): 1,600
Total costs of James Wilson as customer: $86,600

The net benefit is the benefit ($120,000) less the cost ($86,600), or $33,400. With customers providing differential net benefits to the organization, the firm may want to consider differential pricing. For example, customers purchasing large amounts of the product are likely to be more profitable. The organization could give price discounts for large purchases. The next section examines their pricing decision.