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Dakota Office Products Study Case
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18 December 2009
Words: 741 | Pages: 3
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?
- Lack of information about distance taken for “desktop” delivery, so we can’t compute Delivery per Labor Hour because each time there is different distance form the warehouse which makes different cost per delivery.
Is there any additional information you would like to have to explain the relative profitability of the two customers?
- Hours spend on delivery which means Delivery per Labor Hour
- To now the wages or number of personnel
- Number of personnel working in each activity
(for example if all orders going to be place thru EDI then we can know how many employees we can fire.
Assume that Dakota applies the analysis done in question 3 to its entire customer base. How could such information help the Dakota managers increase company profits?
- If they would apply to analysis from question 3 the managers would discover that delivery cost is incorrect and the price for “desktop” delivery should be higher or abdicative to the distance where the order is placed.
- Make higher prices and for the customers who are placing big orders there should be a discount to eliminate high number of customer placing small orders.
- Correct the cost of whole process by determining direct labor hour.
Suppose that major customer switched form placing all its orders manually to placing all its orders over the interest site. How should this affect the activity cost driver rates calculated in question 2? How would the switch affect Dakota’s profitability?
- It would affect Activity One: process cartons in and out of the facility and the driver-cost rate would change.
Rate=EDI Orders/EDI Labor Hours
Rate=8,000/500=16 orders/per hour
So we would have spend Total Orders/Orders per hour = 24,000/16=1500 hours of work and when we compare to 10,000 hours spend before we have worked 8,500 hour less so its 85% less money we spend on wages.
- It also would affect the Activity Four: Data Entry because while using EDI costs would reduce and so the same cost per line would decrees.
- The Profitability would be much higher because two out of four allocation base activity cost would decline so each customer would improve the profit and also number of customers placing small orders wouldn’t affect that dramatically the profit.
- Also there should be bather way of collecting bills from customers so that the interest rate from credit wouldn’t affect the yearly profit.
1. Dakota Office Products Study Case Harvard Business School