Dakota Office Products
Q1) Why was Dakota’s existing pricing system inadequate for its current operating environment? The existing policies being followed by Dakota regarding Accounts receivables are a major issue, which is affecting its payment of working capital line of credit (@10%). Customer A pays its bill within 30 days, whereas B takes up 90 days or more. Dakota can achieve sufficient liquidity, if it tightens its credit policy.| |
2) Develop an activity based cost system for Dakota office products based on year 2000 data. Calculate the activity cost driver rate for each DOP activity in 2000.
Activities & Costs|
Activities| Drivers| Costs|
Ship Cartons| No. of cartons| Freight( commercial& Own)| Process Cartons| No. of cartons| Warehouse Costs(Rent, Personnel & Distribution)| Desktop Delivery| No. of deliveries| Delivery Truck & Warehouse Personnel| Processing Manual Orders| | Order Entry(Processing system& Operators)| Entering Items(Ordered manually)| No. of lines Entered| Order Entry| EDI Processing| Per EDI Order| Quick check of order entry|
Construction of Activity Based Cost System:
In the table that follows
Overhead Cost Items- description of the activity performed. Source of Annual Cost- reference is provided for each cost item (either the numerical basis for the calculation or the reference exhibit in the case study as applicable). Annual Cost - contains the total cost in dollars.
Estimated Annual Value- is the volume
Cost per Driver Unit-is the calculated allocation rate.
Interest was assigned at a rate of 10% of each customer’s average accounts receivable balance. General and Selling Expenses were allocated as the fraction of total sales
3) Using the answer to Question 2, calculate the profitability of customer A and customer B. Profitability Comparison of Customers
The results of the profitability analysis shown in Table 2 are described below. * The gross margins (Sales – Cost of Goods Sold) in the current method For customer A (from exhibit 2): $103000 - $85000 = $18000
For customer B (from exhibit 2): $104000-$85000 = $19000
They differ only by $1000 and hence behaviour is similar
However, compilations of relative activity-based costs indicate the difference in behaviour. Customer A utilized more commercial freight shipments (Customer A: 200 vs. Customer B: 150) due to which a higher activity cost margin is observed (Customer A: $1200 vs. Customer B: $900).
* Customer A did not use any desktop delivery service as opposed to Customer B who requested 25 desktop deliveries at a relative differential cost of $5500. * Number of line items: Customer A’s 60 items, and Customer B’s 180 resulted in an allocation of $240 and $720, respectively. * Customer A placed only 6 manual orders, while B placed 100 manual orders. This results in costs of $60 and $1000 for A and B respectively. * Customer A executed 6 EDI orders at a cost of $30. Customer B did not use the EDI facility. * Each customer warehoused 200 cartons, for an assigned cost of $10,400. * Based on all activity-based costs, contribution margin from Customer A is calculated to be $6,070 and that for Customer B is $480. Thus, here, a huge disparity in profitability of the Customers is observed. As shown in table below, Customer A is slightly profitable with a Net Income Before Taxes of $323, or 0.3% profit as a percent of sales. Customer B on the other hand, works out unprofitable through the activity-based cost system, showing a loss of ($7,414), or (7.1%) as a percent of sales. Table 2 Dakota Office Products: Comparison of Profitability of Two Customers for year 2000 Data
| | | | Customer A| Customer B|
Sales| | | | $103000| $104000|
Cost of Goods Sold| | | | $85000| $85000|
| | | | | |
Gross Margin| | | | $18000| $19000|