Dakota Office Products
PGP1 – Section B
Dakota Office Products
Q.1) Why was Dakota’s existing pricing system inadequate for its current operating environment?
The Account receivable policy is very liberal causing the losses in customer B and is affecting the working capital (10%) line of credit. Average payment period for customer A is 30 days and 90 days for customer B. Dakota's existing pricing strategy is arbitrary, to the extent that it estimates cost markups on the basis of historically exhibited trends, rather than trying to identify cost structures and contributions arising from various activities. The existing costing strategy pools various costs together despite evidence that their underlying drivers are not the same. Dakota has recently innovated by providing desktop delivery, the costs of which, and the historical basis for which has not been established, consequently Dakota finds itself under-costing its services. It is unable to accurately estimate desktop delivery costs which result in the organization incurring losses in the 2000 operating year.
Q. 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:
Please refer to the excel solution sheet attached
Q. 3) Using the answer to Question 2, calculate the profitability of customer A and Customer B.
Customer A and Customer B yielded similar gross margins of $18,000 and $19,000, respectively. However Customer A utilized more commercial freight shipments (200 vs. 150) which resulted in higher activity cost assignment of $1,200 vs. $900 for Customer B. So Compilation of relative activity-based costs shows differences in customer behavior.
Following assignment of Other Costs, Customer A is calculated to be slightly profitable with a Net Income before Taxes of $635, or 0.7% profit as a percent of sales. Customer B has proven to be unprofitable through the activity-based cost system, showing a loss of ($3,590), or (4.2%).
For detailed analysis please refer the excel sheet attached along with.
Q. 4) What explains the difference in profitability between the two customers?
The profitability analysis of customer A and B shows that the interest expense borne by the organization on account of its credit policy results in customer B generating losses for Dakota, with interest expenses of $750.
Additionally, customer B required 25 desktop deliveries throughout the 2000 operating year, which customer A did not avail of. Since Dakota has not accurately costed its...