Dakota Office Products Study Case

1.

Why was Dakota’s existing pricing system inadequate for its current operating environment?

- profits only when clients placed large orders for cartons

- real drop of profit if many clients place small orders

- wrong cost determination for individual customers

- wrong cost determination for new services provided by DOP (to small charges for the “desktop” delivery, then the actual cost of it)

2.

Develop an activity-base cost system for Dakota Office Products based on Year 200 data. Calculate the activity cost-driver rate for each DOP activity in 2000.

Activity cost-driver rates:

Activity One: process cartons in and out of the facility

Rate=(90% of Warehouse Personnel Expense + Cost o Items Purchased)/cartons processed

Rate=(90%*2,400,000+35,000,000)/80,000=464.5 $/per carton

Activity Two: the new desktop delivery service

Rate=(10% of Warehouse Personnel Expense + Delivery Truck Expenses)/desktop deliveries

Rate=(10%*2,400,000+200,000)/2000=220 $/per carton

Activity Three: order handling

Rate=( Warehouse Expenses + Freight)/ number of orders

Rate=(2,000,000+450,000)/(16,000+8,000)=102.08 $/per order

Activity Four: data entry

Rate=Order entry expenses/Order lines

Rate=800,000/150,000=5.3 orders/per line

3.

Using your answer to question 2, calculate the profitability of Customer A and Customer B.

Activity One: process cartons in and out of the facility –> Number of cartons ordered

Activity Two: the new desktop delivery service –> Number of desktop deliveries

Activity Three: order handling –> Number of orders (manual + EDI)

Activity Four: data entry –> Number of line items

Manufacturing Overhead cost-driver rates Customer

A Customer

B Customer A* Customer B*

Activity One 464.5 200 200 92900 92900

Activity Two 220 0 25 0 5500

Activity Three 102.08 12 100 1224.96 102,08

Activity Four 5.3 60 180 318 954

94,442.96 109,562

Profitability:

Contribution to general and selling expenses = number of cartons ordered * (general and selling expenses + Interest expenses)/cartons processed

Customer A Customer B

Sales 103,000 104,000

Cost of Items Purchased 94,442.96 109,562

Contribution to general and selling expenses, and profit 200*2,120,000/80,000=

=5300 5300

Profit 3257.04 - (10,862)

4.

What explains and difference in profitability between the two customers?

- method of delivery (customer B chooses much more expensive delivery for 50 cartons)

- Number of orders made by different number of clients

a) Customer A had 12 customers placing an order for 200 cartons

b) Customer B had 100 customers placing an order for 200 cartons

More different customers placing orders means much higher costs (cost per order is $102.08). So Customer A spend $1224.96 and Customer B spend $102,08 which is $8983.04 more money spent on Customer B.

5.

What are the limitations, if any, to estimates of the profitability of the two customers?

- Lack