Driver Case
Question 1
The existing pricing system that Dakota Office products use is inadequate, because it doesnt differentiate its pricing for the level service provided to its customers. The current pricing system prices products to its end use customers by marking up the purchased product cost to cover warehousing, distribution and freight and then another markup is added to cover the approximate cost for general and selling expenses, plus an allowance for profit. The pricing system ignores the cost associated with the activity of providing the level service to customers. The current system doesnt take in to consideration the number of cartons ordered, the number of cartons shipped commercial freight, the number of manual orders, and the number of lines on manual orders and whether it is an electronic data interchange (EDI)/ internet order.
Question 2 See spreadsheet
Question 3 See spreadsheet
Question 4 Andy I used your answer from question 1
Customer B is not a profitable customer. It places all orders through the non-electronic system, and it takes the manual orders longer to process manually. The EDI system does it automatically. Customer B also ordered 25 desktop deliveries, and this increases costs on DOP to provide the service, including increased personnel costs to maintain capacity. Finally, Customer B pays their bills in 90 days, so thats a longer period than normal that DOP has to wait for their cash.
Question 5
What are the limitations, if any, to the estimates of the profitability of the two customers?
Costs per Carton ordered are based on volume, not on size and weight of each carton. Cartons shipped costs are based on