Midwest Office Products

Topics: Costs, Variable cost, Cost Pages: 2 (490 words) Published: November 16, 2010
1)Based on the interviews and data in the case, estimate:
a.The cost of processing cartons through the facility

The only two costs of processing cartons through the facility are i) warehouse costs, and ii) warehouse personnel costs. Both of these are proportional to the number of cartons. The total processing costs are therefore $54/carton.

b.The cost of entering electronic and manual customer orders Here, the cost is entirely based on personnel costs. Manual costs consist of both i) entering basic information, and ii) an additional cost for each line item. The electronic entry has a single cost.

c.The cost of shipping cartons on commercial carriers

Freight cost per carton is simply the total freight cost divided by the number of cartons shipped by commercial freight.

d.The cost per hour for desktop deliveries

The cost per hour for desktop deliveries includes the cost of both the drivers and the trucks themselves (leasing, maintenance, etc.). There are four drivres working 1500 hours so the cost/hour is the total cost divided by 6000.

2)Using this cost driver information, calculate the cost and profitability of the five orders in Exhibit 2. Compare these costs and profitability to those calculated by Midwest’s existing costing system?

I’m not entirely sure what Midwest’s “existing costing system” is. However, assuming that the major difference is that their existing system does not distinguish between customers who pay late or customers who use different delivery (freight vs. delivery truck), they simply lump all these costs together and it becomes difficult to see which customers are the most profitable. Below, I have calculated the profitability that breaks out the cost of both late payments and different delivery mechanisms.

3)Explain the difference in profitability of the five orders calculated by the ABC system and the company’s existing cost system.

Using the “standard...
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