Dakota Office Products Study Case
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 …show more content…
- 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