Dakota Office Products Study Case
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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
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
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
Customer
Customer A*
Customer B*
Activity One
464.5
92900
92900
Activity Two
5500
Activity Three
102.08
1224.96
102,08
Activity Four
94,442.96 109,562
Profitability:
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=
=5300
5300
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
Customer A had 12 customers placing an order for 200 cartons
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