Allied Office Products

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The following is the case study completed in regards to Allied Office Products. Currently Allied Office Products charges customers a flat fee on product cost. This case study was performed in order to see if Allied Office Products should switch and implement the Sales Based Pricing System.

“ABC” based service costs for the TFC business were calculated and Total Cost/Expense were found to be $1,550,000 Storage, $1,801,000 Requisition Handling, $ 761,000 Basic Warehouse Stock Selection, $734,000 “Pick-up” Activity, $612,000 Data entry, and $250,000 Desk Top Delivery for a total of $5,708,000. After finding the Total Cost we were able to divide that by Activity Driver Units to get the Activity Based Costs. Those costs were found to be $4.43 Storage, $5.81 Requisition Handling, $0.98 Basic Warehouse Stock Selection, $1.05 “Pick-up” Activity, $0.79 Data entry, and $29.41 Desk Top Delivery. Using the ABC Method we were able to calculate a Service Fee Amount of $8,486 for Customer A, and $23,330 for Customer B. Subtracting these totals from the Service Fee Total of $16100 found from the old method shows that Customer A was over charged $7,614 and Customer B was under charged $7,230. It would be fair then to adjust the Service Fee’s charged to each customer to the Totals found using the ABC method. Customer A was found to cost Allied Office Products less money to service, but they were also a smaller source of potential growth for the company. Customer B was found to use a larger amount of services, and has a higher opportunity of increasing Allied Office Product’s revenue. Our suggestion would be to maintain the level of usage of Customer B and increase their service fees. Customer B is more dependent on Allied Office Products, and it’s unlikely they would take their business elsewhere. Customer A is less dependent on Allied Office Products since they use fewer services, and it would be easier for them to take their business elsewhere. We would also suggest maintaining the amount charged for Customer A’s service fees and increasing their level of usage.

In addition we would recommend TFC implementing and applying the sales based pricing (SBP) system. As it currently stands TFC charges all customers, regardless of size, the same percentage of service costs. With the current method there are customers who may be over charged for services they are not using or only use a small amount of services, while other customers are being under charged for services they use a large amount of. By switching to the SBP system it will help make the charges that Allied Office Products charges fair by only charging the customer for what they are actually using, and also helping make Allied Office Products cost allocation process better. A better cost allocation process allows for better analysis of customers to have the knowledge of the more profitable customers, and over time TFC can improve profit by focusing on managing individual accounts in order to identify the most profitable accounts.

“ABC” Based Service Costs for the TFC Business Activity
Total Cost/ Expense
Activity Driver
Activity Driver Units
Activity Based Cost
Storage
$1,550,000.00
Cartons
350000
$4.43
Requisition Handling
$1,801,000.00
Requisitions
310000
$5.81
Basic Warehouse Stock Selection
$761,000.00
Requisition Lines
775000
$0.98
"Pick-Pack" Activity
$734,000.00
Lines Requiring pick-pack
697500
$1.05
Data Entry
$612,000.00
Requisition Lines
775000
$0.79
Desktop Delivery
$250,000.00
Desktop Deliveries
8500
$29.41
Total
$5,708,000.00
 
 
 

Distribution Service Cost for Customer A & Customer B
Activity
Activity Based Cost
Activity Driver
Activity Driver Units
Distribution Cost
 
 
 
Customer A
Customer B
Customer A
Customer B
Storage
$4.43
Cartons
350
700
$1,550.00
$3,100.00
Requisition Handling
$5.81
Requisitions
364...
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