Dakota Office Products Study Case
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)
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
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
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
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=
Profit 3257.04 - (10,862)
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.
What are the limitations, if any, to estimates of the profitability of the two customers?
(2009, 12). Dakota Office Products Study Case. EssaysForStudent.com. Retrieved 12, 2009, from http://www.essaysforstudent.com/Business/Dakota-Office-Products-Study-Case/27920.html
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