Dakota Office Products
9/16/2012
1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
Profit margins varied based upon the size of the order, larger orders were more profitable than small orders. Based upon customer order size, prices should have been varied and the cost determination of the DOP should have been evaluated as it generated a loss.
2. Develop an ABC system for Dakota based on Year 2000 data. Calculate the activity cost-diver rate for each activity in 2000.
a. Order Entry
i. Order Entry Expenses/Order Lines ii. $800,000/150,000= $5.3/line
b. Carton Processing
i. (90% of warehouse personnel expense + Cost of Items)/cartons ii. (.9*2,400,000+35,000,000)/80,000= $464.5/carton
c. DOP
i. (10% of warehouse personnel expense + delivery truck expense)/ DOPs ii. (.1*2,400,000+200,000)/2,000= $220/carton
d. Handling
i. (warehouse expenses + freight)/ orders ii. (2,000,000+450,000)/24,000= $102.08/order
3. Using your answer to #2, calculate the profitability for Customers A and B.
Customer Cost A B Units Cost Units Cost
Order Entry $ 5.30 60 $ 318.00 180 $ 954.00
Carton Process $ 464.50 200 $ 92,900.00 200 $ 92,900.00
DOP $ 220.00 0 $ - 25 $ 5,500.00
Handling $ 102.80 12 $ 1,233.60 100 $ 10,280.00
Revenue $ 103,000.00 $ 104,000.00
Total Cost $ 94,451.60 $ 109,634.00
Net Profit $ 8,548.40 $ (5,634.00)
Profitability % 8.30% -5.42%
4. What explains any difference in profitability between the two customers?
The key difference between the profitability of the two customers is the method of delivery, number, and size of each of each order.
5. What are the limitations, if any, to the estimates of the profitability of the two customers?
Limitations to the estimates of profitability for these two customers are mainly focused around the lack of information. There
1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
Profit margins varied based upon the size of the order, larger orders were more profitable than small orders. Based upon customer order size, prices should have been varied and the cost determination of the DOP should have been evaluated as it generated a loss.
2. Develop an ABC system for Dakota based on Year 2000 data. Calculate the activity cost-diver rate for each activity in 2000.
a. Order Entry
i. Order Entry Expenses/Order Lines ii. $800,000/150,000= $5.3/line
b. Carton Processing
i. (90% of warehouse personnel expense + Cost of Items)/cartons ii. (.9*2,400,000+35,000,000)/80,000= $464.5/carton
c. DOP
i. (10% of warehouse personnel expense + delivery truck expense)/ DOPs ii. (.1*2,400,000+200,000)/2,000= $220/carton
d. Handling
i. (warehouse expenses + freight)/ orders ii. (2,000,000+450,000)/24,000= $102.08/order
3. Using your answer to #2, calculate the profitability for Customers A and B.
Customer Cost A B Units Cost Units Cost
Order Entry $ 5.30 60 $ 318.00 180 $ 954.00
Carton Process $ 464.50 200 $ 92,900.00 200 $ 92,900.00
DOP $ 220.00 0 $ - 25 $ 5,500.00
Handling $ 102.80 12 $ 1,233.60 100 $ 10,280.00
Revenue $ 103,000.00 $ 104,000.00
Total Cost $ 94,451.60 $ 109,634.00
Net Profit $ 8,548.40 $ (5,634.00)
Profitability % 8.30% -5.42%
4. What explains any difference in profitability between the two customers?
The key difference between the profitability of the two customers is the method of delivery, number, and size of each of each order.
5. What are the limitations, if any, to the estimates of the profitability of the two customers?
Limitations to the estimates of profitability for these two customers are mainly focused around the lack of information. There