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?