Dakota office Products: A Case Study
DAKOTA OFFICE PRODUCTS: A CASE STUDY
Dakota Office Products, hereafter referred to as DOP, is a regional distributor of office supplies to institutions and commercial businesses. DOP operates several distribution centers where they store office supplies which are then delivered to the customers when requested. Up until now, the bulk of DOP shipments have been made by commercial truckers. Recently DOP added a new service called “desk top” option where they deliver packages directly to individual locations at the customer’s site for which they charge a small premium of 2%. DOP believes that the added premium could improve the margins of the company. In addition, in 1999 DOP implemented a system called electronic data interchange (EDI) followed by a new internet site in 2000. Use of EDI allowed for automated orders which saved data processing time. However, even with the use of the updated internet site, use of EDI, and added business on the “desk top” orders, DOP’s costs continued to rise. As a result of continued rising costs, John Malone, the General Manager, asked his controller and director of operations to help him evaluate the current business operations and recommend future actions.
ANALYSIS OF CURRENT SITUATION
The controller and the director of operations, Melissa Dunhill and Tim Cunningham, went into the field to determine the cause behind continued rise in costs. First, they asked themselves why was Dakotas existing pricing system inadequate for its current operating environment? They determined that Dakota only profited when the clients placed large orders. They also determined that real drop in profit occurred if many clients placed small orders. In addition, they believe they need a better structure for determining cost on products since they are losing money while their cost of keeping staff, rent, delivery have gone up. In particular, they determined that they need to look at re-structuring the cost of the new services such as “desktop” delivery. While the desktop service attracts new customers, inadequate mark-up of up to 2% for delivery does not cover the costs of providing the service. Another possible area to change is the cost determination for the individual customers.
To test out the current pricing margins, they looked at Activity Based Cost System to analyze the 2000 data. Then, utilize the Activity Based Cost System to compute the allocation rates for each of the identified cost pool and associated cost drivers for the activity. In doing so, they can determine what areas should assume greater allocation rates and which areas should not get the additional allocation. DOP has four main activities that cause overhead to be incurred. The activities are: driver rates to process carts in and out of facility, new desk top delivery service, order handling, and data entry. Calculations are as follows:
Activity