Advisory opinion letter to Mr. Johnson

86 F.

for an advisory opinion concerning whether a proposed quantity discount, if implemented, would constitute compliance with the amended Clayton Act Subsection 2(a) Order in tbe above-captioned matter. According to your letter of March 13, 1975, and attachments thereto, Rorer proposes granting to all direct-buying retail customers a :J.5 percent discount from tbe list price of Maalox products witb any purchase of $250 or more of Maalox products at net prices. Rorer bases the proposed discount on a showing of savings in its costs of delivery and sale.

According to your letter, Rorer currently employs a nationally uniform delivered pricing system in the sales of its products. The net price to direct-buying retail customers, according to the letter, is the suggested price from wholesaler to retailer less 15 percent. To maintain tbe direct account status, however, the retail customer must purchase in terms of net prices at least $125 of any Rorer products in each order and a total of $500 for an entire year. The letter adds that Rorer products are delivered to. direct-buying retail customers by common carrer from warehouses in Fort Washington, Pennsylvania; Tucker, Georgia; Hammond, Indiana; and San Leandro, California. The Commission understands that the proposed discount would amount to a 4.12 percent reduction in tbe net price of Maalox products to participating direct-buying retail customers. According to your letter the discount would not be applicable to non-Maalox products. Finally, it is understood that the discount would be offered to all direct-buying retail customers.

To determine the savings in the cost of delivery, Rorer focuses on savings in tbe cost of sbipping its products to customers located closest to its points of distribution. Sufficient savings to justify the discount to these customers would arise, according to Rorer, by shipping a typical order containing $250 worth of Maalox products instead of shipping two or more typical minimum $125 orders. Rorer reasons, relying on facts previously submitted, that if tbe discount is qualified to the nearcustomers then it would be uniformly cost justified to all customers. To determine tbe savings in the cost of sale, Rorer divides its total 1974 operating cost for processing orders by tbe total number of invoices written to find the average cost of processing an individual order. Rorer contends tbat by processing an order containing $250 worth of Maalox products rather than two more minimum $125 orders it would save the cost of processing at least one invoice. The Commission after reviewing tbe materials submitted in support of the proposed discount hereby advises that, based on the cost justification submitted, the discount would not be uniformly cost justified and would therefore be violative of the above-captioned order. Several erroneous assumptions made in the cost study concerning the costs of delivery and sale require that the justification be rejected. The cost justification is improperly based on a cost comparison which relies on tbe cost of handling a minimum $125 purchase without having established that this size order would be substantially representative of the class of all purcbases not earning the discount. A cost justification must reflect tbe true cost of transacting business and the actual pattern of sales experienced.

The cost justification is in further error because it attempts to qualify the discount in part by savinp;s in tbe cost of handling the order undiscounted non-Maalox products. Since these non-Maalox products would not benefit from the proposed discount it is unacceptable to justify the discount with savings attributable to their cost of delivery or processing in the order. The only savings wbich can be properly considered in supporting a discount on Maalox products are those wbich would reflect due allowances for differences in tbe costs of sbipping and processing orders for Maalox products in differing quantities. Additionally, tbe cost justification erroneously assumes that the entire cost incurred in order processing can be the basis for establishing cost savings. Only that portion of the operating cost which varies with the size of orders processed is suitable for consideration in the cost justification. That portion of tbe cost which depends on the total volume of business transacted without regard to tbe size of orders on which that business is divided would not be relevant to a cost

justification
By direction of the Commission.
Letter of Request

March 13, 1975 Re: New Request for Advisory Opinion Pursuant to FTC Rule 61(d); Ref. Docket No. 8599 Dear Sir:

1. As general counsel, I hereby request, on behalf of Wiliam H. Rorer, Inc., an advisory opinion pursuant to FTC rule 3.61(d) as to wbetber tbe proposed quantity discount, if implemented, would be in compliance with tbe Commission s Order, as modified, August 21, 1967

86 F.

32 Federal Register 12844, Docket No. 85!J9. As modified, tbe Order application was limited to competing retail customers. 2. We also understand that the Order, as modified, does not require to seek this advisory opinion from the Commission prior to instituting a quantity discount compatible with the terms of the Order. N evertheless, Rorer voluntarily elects to seek the Commission s opinion in advance.

3. Rorer proposes to offer only to its retail customers a quantity discount of three and one-balf percent (3- 1/2%) from tbe list price on each single order of $250 (net) or more of its leading antacid product Maalox (suspension or tablets). There is adequate transportation cost justification for this discount as set forth in the attached schedules (see Index of Schedules). Rorer makes prepaid shipments from four locations: Fort' Washington, Pennsylvania; Tucker, Georgia; Hammond Indiana; and San Leandro, California.

4. Rorer s "list price" is our suggested price from wholesaler to retailer. (see General Price List, Schedule F.) Our price to wholesalers reflects a 20% discount from that "list price;" to retailers who buy on a direct basis, our price reflects a 15% discount. Our proposed 3-112% quantity discount to retailers only, on Maalox products only, would provide a direct retail discount of 18- 1/2% from the list price. Tbe nonMaalox portion of tbe order wil continue to bear a 15% discount. Rorer additionally offers retailers a 2% discount for prompt payment. 5. Effective January 1 , 1975, a retailer, in order to maintain his direct account status, must purchase $500 (net) wortb of Rorer products annually. Each order must be for $125 (net) or more of our products. 6. Previous studies of transportation savings made and discussed with a representative of the Bureau of Competition of the FTC have revealed tbat there are three examples that show a minimum savings: from our Tucker, Georgia, branch warehouse to Atlanta, Georgia; from our San Leandro brancb warehouse to Oakland, California; and from tbe San Leandro location to Los Angeles, California. Therefore, we have computed transportation savings on tbe basis of typical orders sbipped from our Tucker and San Leandro branches to tbose locations. 7. Although transportation savings more than justify the proposed 31/2% quantity discount, we also assert a cost justification based upon administrative savings to be gained (Schedule E(a) and (b)). It is our contention that the proposed 3-112% discount is also justified entirely by this analysis alone.

8. Based upon experience during the last six months of 1974, we know that more than 50% of orders shipped to direct buying retailers contained $200 (net) or more worth of Maalox products. It is our firm conviction that under our new terms and prices in effect since January , 1975, the 50% figure will be valid for orders containing $250 (net) or more worth of Maalox products.

9. Enclosed in Schedule G are copies of four sets of published tariff schedules applicable to all four of our sbipping points, although the examples cited refer only to our Tucker, Georgia and San Leandro California branches. The tariff schedules are provided in order to facilitate tbe evaluation of our submission. 10. Schedules A through E, inclusive, contain calculations and data based on a "typical" order which is a competitive trade secret within the meaning of FTC Rule 94.1O(a)(2). Therefore, Rorer expressly asserts a claim of confidentiality to Schedules A througb E, inclusive. If the Commission renders a favorable advisory opinion, Rorer s implementation of the proposal would, of course, be in strict compliance witb all tbe terms of the Order including prompt notification to tbe Commission and adequate and regular notice to all retail customers together with reasons and details of the discount.

Very truly yours

ISI Thomas E. Quay

Advertising and selling as "new " cars used for emission control

tests (85 F. C. 1171). (File No. 753 7005, released January 7 1976)

Opinion Letter

December 4, 1975 Mr. Richard H. J obnson Acting Assistant Administrator for Enforcement United States Environmental Protection Agency Uashington, D.C. 20460 Re: Sale of Vehicles Used to Perform Emission Control Tests Required by the State of California Dear Mr. Johnson:

Tbis is in reply to your letter of May 12, 1975 requesting the Commission s opinion regarding the status 'jof those vehicles sold in the