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 Rate=(90%*2,400,000+35,000,000)/80,000=464.5 $/per carton

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
Rate=(2,000,000+450,000)/(16,000+8,000)=102.08 $/per order

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 Overheadcost-driver ratesCustomer
BCustomer A*Customer B*
Activity One464.52002009290092900
Activity Two22002505500
Activity Three102.08121001224.96102,08
Activity Four5.360180318954
94,442.96 109,562