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N. A. C. A,Vol. XIX, No. 12

I N T W O

Sed

IN T H IS ISSUE

Cost Accounting as Evidence in Cases

Arising Under the Robinson -

Patman Act , by Alber t E. Sawyer . . 681

This Bulletin is published semi - monthly by the NationalAssociation of Cost Accountants, 385 Madison Avenue,New York . Subscription price, $10.00 per year. Enteredat the Post Office, New York, N. Y., as second -class mat-ter August 28, 1925, under the Act of March 3, 1879.

EDITORIAL DEPARTMENT NOTE

With the passage of the Robinson - Patman Act, accountants wereface to face with the necessity of allocating selling and distributioncosts to orders and to customers. Since the burden was placed uponthe seller to justify sales price differentials in terms of cost, and sinceit appeared unlikely that manufacturing cost differentials could beused as a basis for justifying price differentials, in the light of pre-vious rulings of the Federal Trade Commission, attention was focusedon the analysis and allocation of distribution costs. Much has beensaid and written about the possible bases for such allocations. hi themeanwhile we have been waiting for the Commission's decisionsin cases involving price differentials based on differences in sellingcosts. A few such cases have now been decided, others have been dis-missed with the reason for dismissal indicated. Some little light hasbeen thrown on the cost allocation practices which the Federal TradeCommission will accept. The article in this issue of the Bulletin dealswith the conclusions which may be drawn from the actions so farconcluded.

The author of this article is Albert E. Sawyer of the MarketResearch Staff of the Dennison Manufacturing Co. He was theauthor of an article entitled "Cost Accounting Opportunities Underthe Robinson - Patman Act" which appeared in the N. A. C. A. Bulletinjust one year ago. Mr. Sawyer is a graduate of both the School ofBusiness Administration and the Law School of the University ofMichigan. His first accounting and cost accounting experience wasacquired in the automobile industry in Flint, Mich. As Manager ofthe University of Michigan Hospital and the Women's Hospital ofDetroit he gained considerable experience in hospital management.As legal assistant of Mr. George Wickersham he was associated withthe Wickersham Commission. With the Dennison ManufacturingCo., Mr. Sawyer has engaged in methods, marketing and legal re-search, and during N. R. A. days was in charge of co- ordinatingthe activities of the company with respect to various codes by whichit was affected.

COPYRIGHTED BY THE

NATIONAL ASSOCIATION OFCOST ACCOUNTANTS

FEBRUARY 15, 1938

COST ACCOUNT ING AS EVIDENCE IN CASES ARIS-ING UNDER THE ROBINSON - PATMAN ACT

By Albert E. Sawyer, Market Research Staff,Dennison Manufacturing Co., Framingham, Mass.

IT IS our purpose to examine the task which confronts the costaccountant in connection with the application of the Robinson -

Patman Act to pricing policies of firms engaged in interstate com-merce. This law is well into the second year of its existence, andit is safe to assume general familiarity with its terms. Our presentinterest is in the manner of its application, and the kind of ac-counting job that presents itself in actions under this law. Thepast year has provided a few tangible indications of the enforce-ment policies of the Federal Trade Commission, and it has givenus valuable tune in which to define our problems and make thefirst beginnings in the building of acceptable techniques by whichto measure and appraise the price differentials with which the lawis concerned.

Having recognized these advances in the state of our knowledgewith respect to this Act, we must, however, hasten to say that,important as they are, these advances leave large areas still un-explored. The attempt made by this law to protect the publicinterest in a competitive system free from restraint imposed by theexaction by dominant interests of special advantages, has pre-sented merchandising and accounting problems, the extent ofwhich is only just beginning to be apparent. Many more officialdecisions and much clear- headed cost work must be availablebefore we can speak with assurance in this field.

Decisions and Dismissed Complaints to Date

We propose to scan the official determinations of the past yearin so far as they relate to accounting problems, and then to presentsome thoughts regarding the nature of the cost accounting prob-lems involved in the formulation of pricing policies involving dif-ferentials which may be justified under the existing law.

The official determinations of the past year include:Kraft - Phenix Cheese Corp. ( Docket No. 2935 )Hollywood Hat Co., Inc. (Docket No. 3020)Biddle Purchasing Co. (Docket No. 3032)Bird & Sons, Inc., et al. (Docket No. 2937)

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In addition to these four decisions there is an interestinganalysis of some 64 instances in which cases have been dismissedprior to the issuance of a formal complaint. In order to get a com-plete picture of the Federal Trade Commission's attitude as evi-denced by its official proceedings, it is necessary to take all ofthese cases into consideration.

Not all of these cases involve cost accounting problems; infact, there is scant reference to cost work in any of the cases,but we hope to show that this does not indicate any lack of intereston the part of the Commission, but rather the fact that in manycases it is possible to determine the justifiability of a differentialwithout becoming involved in controversial accounting technique.A full appreciation of this feature by the accountant in the ap-proach to these problems is important in establishing maximumtolerances under the law. The full force of this will appear inconnection with the discussion of the Kraft - Phenix Cheese case.

Burden of Proof on Commission in Goodyear- Sears, Roebuck Case

Before beginning the discussion of this case, however, it is wellto refer back to the action of the Federal Trade Commission inconnection with the relations of the Goodyear Tire & RubberCo. with Sears, Roebuck' in the sale of its tires. The case wasdetermined prior to the amendment of the Clayton Act by theRobinson - Patman Act. The Commission's decision is replete withreferences to intricate cost accounting problems, and provides afruitful field for controversy with respect to the conflicting theoriesof costs advanced by the parties to this case. Those who expectedthe Kraft - Phenix case to provide a similar display of cost deter-mination technique must have been disappointed, and may havegained the impression that the Commission had abandoned its con-sideration for cost accounting principles. I do not think that thisis the proper inference to draw from this comparison.

In the Goodyear case the Commission was operating under alaw which placed the burden upon the Commission of proving thedifferential to be in excess of cost. This showing had to be apart of its affirmative case. The Robinson - Patman amendmentshifts this responsibility. The quantity discount provision of thenew Act is a proviso and not an exception. This has the effect of

' Docket Number 2116.

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placing the burden of proving the differential to be within costlimits upon those who wish to take an otherwise discriminatorydiscount out of the illegal category. In the absence of proof bythe respondent as to cost justification, the Commission can restits case when it has shown the existence of the differential, itsapplication among competitors, and some perceptible injury tothis competition.

No Injury to Competition in Kraft - Phenix Case

In the Kraft - Phenix case the element that was lacking was proofof injury to competition by vir tue of the allowance. A searchof the records shows very clearly that retailers who earned the5 per cent discount, and those who did not, continued to sell side byside with no perceptible effect upon their ability to sell the goods.Those who received the 5 per cent did not reflect this gain in lowerretail price. Those who could not buy sufficient to get the dis-count received 25 cents per week less profit, and this was toosmall, even on a cumulative basis, to make any difference in theirability to continue in the business of selling these products.

The Commission was unable to establish the primary require-ment of injury to competition; therefore, the respondent was notcalled upon to make his defense with respect to cost justification.On the contrary, the record revealed that the practice of theCorporation in making an even exchange on old stock, relievedthose who availed themselves of the discount, of carrying excessivestocks. The purchaser had no fear of loss by deterioration. Thiswas affirmative evidence of the reasonableness of the differentialand the fairness with which it was administered.

The Commission gives recognition in its memorandum opinionto evidence showing the costly nature of the delivery system de-signed to insure the freshness of the product when delivered, andto facilitate the return of products which were not fresh. In thisfact the element of cost is of some significance, although by nomeans controlling. It merely helps to prove the reasonableness ofthis effort to raise the minimum order up to $5 in as many casesas possible. Had all of the other facts remained the same, theabsence of this testimony could have made little difference in thefinal result because a discrimination is not illegal unless it can beshown that there is an injury to competition, and the cost of de-

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livering by this method could have no effect upon the ability ofthe less - than -$5 purchasers to continue to do business in theproduct. Therefore, there was no particular pressure upon eitherside with respect to the method by which this cost of deliverywas computed.

A reasonable rough and ready calculation was acceptable. Therecord of the case shows considerable testimony on this point,however. The refrigerator trucks which carr ied these productsto retailers' doors carried a large variety of products, many ofwhich were not involved in the $5 group purchase discount. Thisdiscount was applicable only to packaged cheese items, and cer-tain salad dressing products. The Commission did try to bringout a basis for the allocation of these delivery costs to cheese andsalad items, but it was shown by respondent and expert witnesseshow this created an almost impossible accounting task whichwould have been very costly and of doubtful value. The Com-mission was, therefore, satisfied with the showing that the averagetruckload per week was about $750 worth of merchandise, and thatthe average cost of operations per week was roughly $ioo. Hencethe general conclusion that this cost averaged about Q per cent or14 per cent of the gross value of the sales so made.

Promotional and Quantity Discounts Distinguished

One item of particular interest in this case lies in the distinc-tion which is drawn between a promotional discount and an ordi-nary quantity discount. In the words of one witness (page 1188of the record) :

"It is not a discount that is large enough to incite a retailerto give it away if he is intelligent, because on a $5 or $topurchase, 5 per cent discount means 25 cents or 5o cents,and he has to earn it, it takes him a week or two to earn thediscount. He earns it by devoting special attention, perhapsmore than the average attention to cheese and salad products,more than the average he gives to run -of- the -mine products inhis store. Consequently, it has a strictly promotional value

In other words, the discount that is just enough to incite alittle more interest in the product, but not enough to cause any

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difference in the retail price, is a promotional discount. The dis-tinction may prove to be a useful one in approaching these prob-lems.

The respondent's case was strengthened by evidence tending toshow that those who did not receive the discount still had a marginof profit about equal to that of the general run of grocery products.Hence, they were not forced to sell the cheese products at a lossin order to stay in the business of selling these items.

There were some other discounts involved in the complaint, butsince they were less onerous than the 5 per cent on $5 purchases,there was an even greater lack of proof of the essential injury tocompetition.

BurdenofJustifying Price Differentials on Grantor

These comments on the Kraft - Phenix Cheese case are limitedto its cost accounting aspects. It should be noted in passing thatthere are many more points in the case of interest to the lawyerand the economist, but from the strictly accounting point of view,the facts of the case did not raise important accounting issues.In reading this decision, it is important to avoid the conclusionthat similar results necessarily follow in other cases. Certainlywe are not relieved of the necessity of being prepared to justifycost differences where quantity differentials are employed, be-cause we cannot know in advance of the trial of a case whetheror not there is sufficient evidence to support a finding of injuryto competition. It would be dangerous to assume in advance thatsuch a finding could not be made and, therefore, no cost justifi-cation would be necessary. At this point may I repeat what Isaid in an earlier paper on this subject in reference to the para-graph of the Act which deals with quantity discounts:

"I t should be noted that we are dealing with a provisoand not with an outright exception. This is more than a quib-bling over the legal significance of two words. Had the Con-gress seen fit to introduce Section (a) with a phrase thatmade it unlawful to discriminate in price except when dueallowance had been made for the cost, etc., the Federal TradeCommission's job of establishing a prima facie case wouldhave included proof of the negative fact that due allowancehad not been given. As it is, the establishment of a prima

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N. A. C. A. Bul let in February 15, 1938

facie case does not involve such proof, and it falls to therespondent to show that he has this justification. In otherwords, the utilization of quantity differentials is a privilege,and those who seek the benefits of the privilege must be readyto answer when challenged." 2

No Cost Defense in Hollywood Hat Case

The Hollywood Hat case is one in which we may assume thatthe respondent elected not to come forward with a complete costaccounting justification for the discounts which were the subjectof the complaint. An analysis of the cost of the hat "bodies" andthe cost of labor of trimming the hats is shown, but there is noevidence of the cost of selling. There appears to be no differencein cost due to quantity purchases of the bodies, and since thetrimmers were paid on a piecework basis, quantity purchased gaveno per unit advantage with respect to labor cost. The respondentoffered no evidence of any savings in selling cost. It was not upto the Commission to demand any more facts than the respondentdesired to introduce. The evidence of injury to competition hadbeen established. The discount was, therefore, of the kind pre-scribed by the Act unless it could be brought within the proviso.Since the respondent brought forth no facts on this point, the Com-mission could rest its case on the record thus established. Itfound, therefore, that this discount was illegal and ordered therespondent to cease and desist.

Cost Issues Not Confined to Cases Involving Quantity Discounts

The Biddle case did not involve cost accounting issues. Itshould be pointed out in passing, however, that cost issues arenot confined to cases involving quantity discounts. A case in-volving an issue as to what constitutes "like grade and quality"might well involve intricate cost problems. When the Commis-sion undertakes to exercise its right under the statute to "fixand establish quantity limits," it will be confronted with theburden of undertaking some important cost determinations.Many of the cases which will arise under the provisions requir-ing the rendering of services on "proportionately equal terms"

' Cost Accounting Opportuni ties Under the Robinson•Patman Act, by Albert E. Sawyer,N.A.C.A. Bulletin, Vol. XVII I , No. 12, Feb. 15, 1937.

W


will introduce nice cost questions. The appraisal of allowancesgranted under differing circumstances will give the cost ac-countants plenty of chance to exercise their skill and ingenuity.Cases of this sort are yet to be presented, but, undoubtedly, thecoming year will bring some to light.

Standard Brands Case Promises Interesting Cost Phases

There is one case now approaching its final stage whichpromises some interesting cost accounting phases. This is theStandard Brands case involving quantity differentials employedin the sale of yeast to bakers. An examination of the complaintindicates the likelihood of a thoroughgoing examination of thecost justification for the discount series of ten quantity brackets.They are substantial discounts and this increases the chancein the finding of injury to competition. In some respects, thecase is similar to the Kraft Cheese case, but in most respects,the issues will be very different. The Kraft case dealt with avariety of products, while the yeast case involves a single item.The Kraft case dealt with the sale of products to retailers forresale. The yeast case deals with the sale of the products tocommercial consumers. This is a difference which will raisesome new and interesting issues. The nature of the injury tocompetition changes markedly under these circumstances. Thetendency toward monopoly on the part of the seller is bound tocome in for consideration, and it will be interesting to note ifthese differentials can produce unfair advantages among buyersnotwithstanding the fact that yeast is such a small part of thecost of the baker's product. If there is a finding of injuryamong the buyers, the scope of the Act will undoubtedly bebroadened much beyond what otherwise might be the case.

There is a similarity in the two cases in that both the cheesemanufacturer and the yeast distributor employ extensive andnation -wide truck delivery systems, and the cost of selling anddelivering will tend to revolve around the cost accountingfeatures of sizable fleets of delivery trucks. The cost problemsof the yeast case will be somewhat simplified by the fact thatthe trucks carry but one product, but to offset this, there willbe the difficult task of allocating costs to different quantitybrackets, and there are ten of them. The hearings in this case

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N. A. C. A. Bulktin February 15, 1938

have been going on for some time, and the records to date re-veal the fact that there will be a serious attempt to meet theissues involving costs in a thoroughgoing manner. We canlook forward to the final determination of this case with keen in-terest, and present indications are that we may expect the Com-mission's ruling during the first half of this year. Of course, in thiscase, as in the Cheese case, the significance of the cost issues willfade if the Commission cannot establish the fact that the scale ofdiscounts produce injury to competition or creates tendencies to-ward monopoly.

The Bird & Sons Case

One cannot pass from a review of the cases already decidedwithout some reference to the Bird and Sons case. The Commis-sion could have dismissed the case entirely upon the point that theselling plans of the respondent had changed so as no longer to in-volve selling to two classes of trade at varying price levels. TheCommission went on to find, however, that there was discrimina-tion during June and October, 1936, between ordinary retailersand mail order houses; on the other hand:

a. Evidence was introduced to show that it cost 18.6 per centto sell mail order houses and 47.1 per cent to sell ordinaryretailers, whereas the discrimination in price was only 14to 18 per cent.

b. This evidence was corroborated by an accountant for theCommission.

c. The amount of the discrimination existing in the cases wasapparently within the terms of the difference -in -costproviso.

Danger in Applying Cost Standards of One Case to Facts ofAnother

The inclusion of this finding in the record of this case mightwell lead to the supposition that there is a very wide spread in thecost of selling mail order houses and ordinary retailers. It wouldbe well to guard against indiscriminate application of such a con-clusion. It should be remembered that in so ruling, the Commis -

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sion is reacting only to the facts of the case before them. A con-sideration of the circumstances surrounding the Bird case mightwell put us on guard in this respect. The company had for somemonths been in the process of transition from sales to run- of -the-mine retailers to sales only to jobbers and mail order houses. Theexamination by the Commission came at the close of this transitionperiod. Therefore, we have a rather special set of circumstanceswhich might not fit at all in considering the relative cost of doingbusiness under more normal circumstances. It should be remem-bered also that all retailers do not offer the same selling problem,and that there are wide variations in the cost of selling differenttypes of retailers in different industries. A more normal pictureis apt to show a much narrower margin of difference in the caseof larger retailers or retailers in metropolitan areas. These com-ments simply serve to stress the fact that it is unsafe to generalizefrom the decisions of a given case without knowing a great dealabout the circumstances upon which the findings were based. Thiswill be especially true of the Commission's rulings with respect toaccounting technique used in the justification of otherwise dis-criminatory practice, and special care must be exercised in apply-ing the cost standards of one case to the facts of another.

Possible Attitude ofCommission in Judging Cost Practices

One of the problems which is confronting the Commission isthe recognition of this danger. The Commission must, of neces-sity, avoid being placed in the position of being arbiter of account-ing practice. To avoid this, and at the same time choose as be-tween rival cost practices, is difficult indeed. This is a genuineproblem when a choice must be made in a given case. It is stillmore difficult when it begins building a series of cases, and isurged to be consistent in its ideas about cost. Undoubtedly, whatthe Commission would like to accomplish would be to give fullcredence to any reasonable accounting thesis in any given case,without regard for the method of proof employed in previous cases.This would be especially true where the cost system of a respond-ent had been in use for a considerable period of time, and not con-cocted for the purposes of answering the complaint. But I thinkwe can recognize the difficulties which may befall the Commissionin the pursuit of this ideal position.

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As time goes on, it may be possible to avoid the pressure tofollow precedents. This contains a lesson for the accountant, andfor the Commission. On the part of the Commission, it must ex-ercise special care in the wording of its findings to avoid thesemblance of a desire to establish an approved standard procedurefor the cost accounting profession. On the part of the accountantthere is the added burden of proceeding in good faith on the basisof the best traditions of his profession. Careless workmanship inthe presentation of cases, willful disregard for sound practice underthe pressure to win cases, will hasten the tendency for the Com-mission, and for the courts, to freeze the standards of accountingpractice, and this result would have the unfortunate effect of pre-venting that degree of flexibility which is so necessary for theproper development of cost work in the newer fields of distributionand selling costs.

This brief examination of the treatment of cost accountingproblems in the few cases which have been decided under this Actemphasizes the truly pioneering nature of the cost work whichmust be done in this field. Distribution cost techniques are, forthe most part, new and untried, and this Act puts them to a verysevere test. It is hardly necessary to point out that the accountantmust proceed with the realization of the limitations of his knowl-edge, and, by the same token, he must not follow the meagerprecedents of the early cases too blindly.

Dist ribut ion Cos t Analysi s And I t s Other Uses

While a few accountants will be called upon to meet the chal-lenge of a specific complaint under the Act, many more will befaced with assignments from management desiring to establish abasis upon which to share with certain customers such economiesof distr ibution as may be due to their particular method of pur-chasing. These assignments may well arise not only from a desireto be within the law, but as a businesslike test of the efficiency ofa particular distribution policy. Just as the growth of productioncost accounting pointed the way to economies which could be re-flected in price, so may this new interest in distribution costs pavethe way for a critical examination of present -day distributionmethods. It may be well to examine some possible approaches tosuch assignments. In the first place, the job is somewhat different

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than that which confronts the accountant when he is called uponto assist in the defense of an existing plan of differentials whichare the subject of a complaint. The job requires the establishmentof cost limits within which a plan of price differentials can be de-veloped. It is more than just a defense, and calls for a high degreeof imagination and ingenuity in revealing savable costs and estab-lishing the basis for more effective distribution methods.

Factors Influencing Possible Economies in Distribution

One of the most difficult assignments of this character is thatwhich involves the determination of justifiable differentials in thesale of a line of resale merchandise containing many widely differ-ing items distributed through numerous channels of trade. It maybe helpful to sketch out some of the approaches to such an assign-ment.

The accountant is asked to demonstrate that the sale of a giventotal quantity of merchandise involves some methods of purchasingwhich are less costly than others. The possibility for economy inpurchasing falls under three headings:

i. Solicitation costs —By increasing the volume of purchaseson each order, the amount of time and effort spent upon anaccount by the selling organization should be reduced.

2. Order- handling costs —Here again an increase in the vol-ume of purchases should reduce that portion of order -handling costs which fluctuates with the number and notwith the size of the order. At the same time, the reductionin the number of shipments on each order will have someeffect upon order- handling costs.

3. Production costs —An increase in the volume of purchaseper order may have some effect upon production costs byspreading setup costs over a greater number of units. Buthere savings may be limited in the case of merchandisemade for stock.

The accountant's problem is to establish methods for the ap-praisal of these economies, and to devise means of inducing cus-tomer co- operation in achieving them.

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Quality Discount By Commodities Sometimes Not Applicable

The most common device for this purpose is the quantity dis-count applied to each commodity. But as applied to a varied lineof resale merchandise, it is not easy to allocate cost savings tospecific commodities. Especially is this true when the solicitationcosts are analyzed. The selling effort is spread over the entire line,and is not centered upon individual items. The salesman makesregular calls upon his wholesaler and retailer customers for thepurpose of replenishing their stocks. His calls are in the nature ofservice calls, and the dealer depends very largely upon him tomaintain his stock. Under these circumstances, there is likely tobe less correlation between the potential volume of business of thecustomer and the sales effort expended thereon. The number ofitems carried is a larger factor than the amount of each item pur-chased.

Other Methods of Allocating Solicitation CostsIt is not uncommon for such resale lines to contain hundreds or

perhaps thousands of items, each distinctly separate commodities,but, nevertheless, inseparably joined in a common selling effort.There are genuine difficulties in approaching the job of allocatingsolicitation costs to individual items in such a case. Under somecircumstances, it may be possible to establish a pattern of salesperformance as among the several items; that is, the sale of onehundred units of one commodity may be likely to indicate the saleof ten items of another commodity, and so on through the list. Ifsuch a pattern emerges, it may form the basis for an expense allo-cation by individual commodities. But more frequently, such apattern is not sufficiently distinct for such a purpose, and this ap-proach, therefore, is not usually available.

Furthermore, this type of selling develops a high correlationbetween the number of sales and calls and the number of orders.Mail orders from regular dealers tend to be a minor value factor,the bulk of the sales centering around the salesman's regular visits.Therefore, the cost of selling a given account tends to be measuredby the frequency of the salesman's calls.

Correlation of Orders with CallsA discount based upon individual quantities might fail entirely

to produce fewer calls and fewer orders. The dealer would be

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quick to realize that each time he could order fewer items in thelarger discount quantities. This would produce as many ordersand demand as much selling effort, so that if the discount con-tained an estimated allowance for savings in solicitation costs, itwould not be realized and the seller would share a theoretical sav-ing which was never actually achieved.

The high correlation between orders and calls suggests the useof order value as one basis for expense allocation and discountscale. This approach recognizes the character of the selling prob-lem, and the proper sort of discount on this basis would have atendency to sell a given amount of merchandise with fewer orders.But as we have already noted, the maximum savings involved ina given method of purchasing must consider order - handling costsas well as solicitation costs.

Order - Handling Costs

Order - handling costs, like production costs, center upon thecharacter of the specific commodities which are handled. Thephysical characteristics of individual items play a large part indetermining cost behavior. In this field the traditional quantitydiscount is the more accurate measure of favorable costs due to thevolume of purchases. This suggests that perhaps the most satis-factory answer may be found in a combination of order valuesand quantity discounts. Thus, it would be possible to exert a two -way pull, one for a higher average order value and the other foran increased quantity of each commodity purchased. The simul-taneous achievement of the two objectives holds the greatestpromise of genuine savings in the costs, both of solicitation andorder - handling.

Factors to Consider

In approaching an analysis of solicitation cost savings, it is im-portant to recognize that:

a. The resale -item salesman presents and sells a line of goodsrather than an individual commodity.

b. Presenting and selling (or presenting and not selling) anyitem is made possible only by the fact that many otheritems are carried.

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c. Many items are carried only to complete the line. Expenseof presentation must be borne by items when sold ratherthan when presented.

d. It is impossible and impractical to measure the actual timespent on each commodity, and to determine whether thecommodity itself was the cause of the expense, or whetherit was introductory to other items.

The consideration of order - handling costs must recognize thefollowing elements which distinguish it from solicitation costs:

a. A large part of the effort consumed in handling an orderis traceable to the specific commodity; hence, the necessityfor the distinct order - handling cost factor for each product.

b. The order - handling cost resulting from the several jointcost factors is in direct proportion to the number of prod-ucts (or items) on the order.

The limitations of a paper of this character prevent the presen-tation of the interesting details involved in the working out of theseproblems as they apply to a complex resale merchandise line. It ispossible only to touch upon some of the major steps in the process.

Establishing a Range ofCost Savings as Basis for Discount Scale

The evolution of an order value discount scale which may havea reasonable cost justification offers a special challenge to the in-genuity of the accountant. In this field the ordinary productioncost technique may not prove very helpful. Detailed time studyanalysis presents many variables which largely destroy their use-fulness. It is possible, however, to derive from a study of the ex-isting situation a reasonable approximation of the extent of oper-ating under extreme conditions. That is, the condition represent-ing the average order purchased in single units per item and thecondition wherein the average number of units purchased of eachcommodity is three or four times as great as the present average.This approach would establish a range of cost savings into whichto fit the discount scale. For instance, knowing the present averagenumber of units (that is, cartons, dozens, pounds, sheets, etc.)per item, it is possible to gain a fair knowledge of the cost of salessolicitation if the average consisted of either higher or lower quan-

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tities. Once this picture is brought into focus, it is not difficult toestablish a reasonable estimate as to the cost of selling under thesevarious conditions. These cost estimates would establish a reason-able basis for an appraisal of the relative cost of doing business asbetween the value of orders representing the minimum situation,and the value of orders representing other significant steps in therange between minimum and maximum.

Method Illustrated

Let us assume the following to be the findings from a study ofthis character:

Value % Cost to Sell1. Average order containing one unit per item.

$1 2 . 5 0 2 5 %

2. Average order containing four units per item.$5 0 . 0 0 12Y2%

3. Average order containing eight units per item.$ 1 0 0 . 0 0 I O %

4. Average order containing sixteen units per item.$ 2 0 0 . 0 0 9%

From these findings, it would seem to be entirely reasonable toconclude that the difference between these percentages representsa fair appraisal of the present difference in the cost of solicitingorders in these different order value classes. Such a study mightwell be the basis for the management to assume that a 5 or 6 percent discount on orders of $50 or more might be offered as an in-ducement to order less frequently, but in larger volume, with aresulting decrease in the demand for sales solicitation service.The management could go further and offer, in addition, 1 per centon orders in the $loo class and, again, an additional I per cent inthe case of orders in the $ 2 0 0 class.

The regular quantity discounts would be limited to savings in-volved in order - handling, and when so approached, the cost prob-lem is not unlike that of the ordinary production cost technique. Itis easier, therefore, to build a range of cost savings for order -handling on the quantity discount basis which can be justified bywell known cost accounting procedures, and having established the

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range of savings, the management is in a position to establish thescale of discounts within these limits.

The resulting price list would reveal the two -way discounts, thediscounts given for order value, plus the discounts given on quan-tity purchases.

Results of Such Study May Be Far- Reaching

It is unnecessary for me to dwell upon the fact that an assign-ment of this character involves many difficulties. Essentially, itis a new field and those who undertake work of this character mustdo so in the spirit of the pioneer. If approached in this spirit, thetask will reveal itself as one that is not confined to compliance withthe Robinson - Patman Act. The results achieved by clear- headedcost work in the field of solicitation and order - handling costs maybe as far - reaching in their effects upon future merchandisingpolicies as was the work of the cost accountant a generation agoin charting the course of production efficiency. It may well be thatthe stimulus supplied by the interest in this Act may bring to theattention of management aspects of selling and handling costswhich reveal the need for substantial adjustment of distributionpolicies regardless of the terms of the Act itself.

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BIBLIOGRAPHY

COST ACCOUNTING UNDER THE ROBINSON- PATMAN ACT

N. A. C. A. Publications:

Accounting for the Robinson - Patman Act. Willard L. Thorp. 1937Year Book, pp. 6 -27.

Distribution Costs as Factors in Pricing Policy. Howard C. Greer. Sec. I,November 1, 1937.

Cost Accounting Opportunities Under the Robinson - Patman Act. Albert E.Sawyer. Sec. I, February 15, 1937.

Cost Factors in the Determination of Price Discrimination. W. H. S.Stevens. Sec. I, February 15, 1937.

Defenses Under the Robinson - Patman Act, with Special Reference toCost Defenses. A. S. Aronson. 1937 Year Book. pp. 27 -47.

General (Recent):

Cost Under the Robinson - Patman Act. Willard L. Thorp. Dun's Review,290 Broadway, New York, November, 1937.

Robinson - Pathan Act and the Accountant, The. J. B. Scholefield. Jour-nal of Accountancy, 135 Cedar St., New York, N. Y., July, 1937.

Suggested Basis for the Distribution of Estimated and Actual SellingExpenses to Sales Departments and Territories. Sales Manage-ment, 420 Lexington Ave., New York, N. Y., August 1, 1937.

6 7

t A

cal nnouncing

The Technical Programfor the

Nineteenth International Cost Conference

PALMER HOUSE, CHICAGO, ILLINOIS

JUNE 20, 21, 22, 23, 1938

General Theme — CONTROL OF INDUSTRIAL COSTSTuesday morning:

Theme —COST CONTROL AND ECONOMIC PROGRESS1. Cost Control as a Basic Problem of Industry2. The Accountant's Relation to Cost Control

Tuesday afternoon:Theme — ESSENTIALS OF COST CONTROL

1. Underlying Principles2. The Tools of Cost Control

Wednesday morning:Theme — APPLICATION OF COST CONTROL TO MATERIALS

1. The Control of Inventory Investments2. The Control of Material as a Cost Element

Wednesday afternoon:Theme— APPLICATION OF COST CONTROL TO MANUFAC-

TURING1. Control of Labor Costs2. Control of Factory Overhead at Varying Levels

of ProductionThursday morning:

Theme— APPLICATION OF COST CONTROL TO DISTRIBU-TION AND ADMINISTRATIVE EXPENSES

1. Control of Distribution Costs2. Control of Administrative Costs

Thursday afternoon:OPEN FORUM

n. a. c. a,...p # . j 0 p r _ f ' t y oil the na110nial. associai icaii of cg t...

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