Dakota Office Case study
Activity cost-driver rate: Activity one; process cartons in and out of the facility rate= (90% $/per carton Activity Two: the new desktop delivery service Rate=(10% of warehouse personnel expense = delivery truck expenses)/desktop deliveries Rate= $/per carton Activity Three: order handling Rate=(warehouse expenses + freight)/ number of orders Rate= + + $/per order Activity Four: data entry Rate?order entry expenses/order lines Rate-800,000/1 orders/per line 3. Using your answer to Question 2, calculate the profitability of Customer A and Customer B.
Method of delivery (customer B chooses much more expensive delivery for 50 cartons)) Number of orders made by different number or clients A) Customer A had 12 customers placing an order for 200 cartons. B) Customer B had 100 customers placing an order for 200 cartons More different customers placing orders means much higher costs (cost per order is $102. 08). So customer A spend $ 1224.
96 and customer B spend$ 102,08 which is $ 8983. 04 more money spent on customer B . What are the limitations, if any, to the estimates of the profitability of the two customers?
Lack of information about distance taken for and #8220: Desktop and #8221 : delivery, so we can &# 8217: (t) complete delivery per labor hour because each time there is different distance from the warehouse which makes efferent cost per delivery. Is there any additional information you would like to have to explain the relative profitability of the two customers? Hours spend on delivery which means delivery per labor hour or know the wages of number of personnel working in each activity (EDI tells us order going to be placed then we know many to fire). 7.
Assume that Dakota applies the analysis done in Question 3 to its entire customer base. How could such information help the Dakota managers increase company profits? If they would apply to analysis from question 3 the managers would discover that livery cost is in corrected and the price ” desktop & # 8221 : delivery should be higher or abdicate to the distance where the order id placed. Make higher prices and the customers who are placing big orders should be a discount to eliminate high numbers tot customer placing small orders determine direct labor hour. . Correct the cost tot whole process .
Suppose that a major customer switched from placing all its orders manually to placing all its orders over the Internet site. How should this affect the activity cost driver rates calculated in Question 2? How would the switch affect Dakota reparability? It would affect activity one: process cartons in and out of the facility and the driver cost rate would change. Rate= EDI order/ EDI labor hours Rate= 8,000/500=16 orders/per hour So we would have to spend total orders per hour = 24,000/ 16 = 1500 hours if work and when we compare to 10,000 hours spend before we have worked 8,500 hours less so its 85% less money we spend on wages.
It also would affect the activity four. Data entry because while using EDI costs would reduce and so the same cost per line Mould decrees. The profitability would be much higher because two out of four location base activity cost would decline so each customer would improve the profit and also the number of customer placing small orders would & 8217; affect that dramatically the profit.
Also there should be a better way of collecting bills from customers so that the interest rate from credit wouldn’t # 8217: affect the yearly profit.
Reference Dakota Office. Study mode. Com retrieved 09, 2010 Dakota Office Products Dakota Office Products Company priced its products to the customers by marking up the purchased product cost by about 15% to cover the cost of warehousing, striation, and freight, and adding another markup to cover the approximate cost for general and selling expenses, and profit. This pricing system was inadequate for its current operating environment since each customer required different product ordering and distributing ways, which cost differently.
Moreover, according to the case scenario, we know that those costs that were considered in product pricing strategy were not accurately assigned to each order and needed to be finely reallocated.
So, in order to set up a better pricing system for the company and help curing out its current business operation issue, we need to analyze its cost and profitability using the Activity-Based Costing method.