BUSA 5061: Accounting For Managerial Decision-Making
November 4, 2010
The following analysis is written for Dakota Office Products to evaluate current business operations and recommend future actions necessary to ensure company success. In our analysis of the company we will identify inefficient business practices that have led to the companies first profit loss in its history. We will evaluate the company’s current pricing structure, ordering methods, shipping and delivery process, and deficiencies in cash flows.
Dakota Office Products current pricing system is inadequate for its current operating environment. Dakota Office Products is a regional distributor of office products to institutions and commercial businesses, with a reputation for excellent customer service. Dakota Office Products currently provides a diverse product line and uses a cost plus method for pricing goods. Allocating a fixed mark-up for all products offered has been effective, but Dakota Office Products may be missing opportunities for increased profit in products where margins could be larger. Dakota Office Products also introduced a new delivery concept this year, Desktop Delivery, to attract new business and offer a more personalized experience. The new service did attract new customers but the inadequate mark-up of 1.2% for desktop delivery did not cover the costs of providing the service. If clients utilizing desktop delivery place smaller orders it has a negative effect on profit because costs are not covered.
To test the current pricing margins, an Activities Based Cost System was used to analyze the 2000 data and determine what areas should assume a greater allocation rate as well as identify the areas that should not. First we graphed out the cost pools seen within Dakota Office Products and associated expenses that applied to those pools (Table 1). Then utilized the Activities Based Cost System to compute the allocation rates for each identified cost pool and associated cost driver. The cost pools identified that caused overhead to be incurred are: Warehouse Processing, Commercial Shipment, Desktop Delivery, Set-up Manual Orders, Manual Order Entry, and Validate EDI Orders. Table 1
|Cost Pools | |Annual Cost |Cost Driver |Annual Driver Qty |Allocation Rate | |Commercial Shipment |$450,000 |$450,000 |Number of Cartons |75,000 |$6 | | |(Freight) | |shipped by commercial | | | | | | |freight | | | |Desktop Delivery |$200,000 |$440,000 |Number of Desktop |2,000 |$220 | | |(Delivery truck expense) | |Deliveries | | | | |$240,000 | | | | | | |(10% Warehouse labor) | | | | | |Set-Up Manual Orders |20% of $800,000 |$160,000 |Number of Manual |16,000 |$10 | | |(2,000hr/10,000hr) | |Orders entered | | | |Manual Order Entry |75% of $800,000 |$600,000 |Number of Order Lines |150,000 |$4 | | |(7,500hr/10,000hr) | |manually entered | | |...