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    Dakota Office Products

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    sourabhphanase
    Dakota Office Products was concerned about the inadequacy of its existing pricing system for the current operating environment. It developed an activity-based costing system using 2000 data to calculate activity cost driver rates for each activity like shipping cartons, desktop delivery, order handling, and data entry. The analysis found that Customer A was 6.1% profitable while Customer B was 3% unprofitable due to differences in ordering methods, delivery needs, and account receivables. Switching a major customer to online ordering could lower certain activity cost driver rates and improve Dakota's overall profitability.

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    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    Dakota Office Products

    Uploaded by

    sourabhphanase
    560 views10 pages
    Dakota Office Products was concerned about the inadequacy of its existing pricing system for the current operating environment. It developed an activity-based costing system using 2000 data to calculate activity cost driver rates for each activity like shipping cartons, desktop delivery, order handling, and data entry. The analysis found that Customer A was 6.1% profitable while Customer B was 3% unprofitable due to differences in ordering methods, delivery needs, and account receivables. Switching a major customer to online ordering could lower certain activity cost driver rates and improve Dakota's overall profitability.

    Original Title

    Dakota Office Products(2)

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    Dakota Office Products was concerned about the inadequacy of its existing pricing system for the current operating environment. It developed an activity-based costing system using 2000 data to calculate activity cost driver rates for each activity like shipping cartons, desktop delivery, order handling, and data entry. The analysis found that Customer A was 6.1% profitable while Customer B was 3% unprofitable due to differences in ordering methods, delivery needs, and account receivables. Switching a major customer to online ordering could lower certain activity cost driver rates and improve Dakota's overall profitability.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    560 views10 pages

    Dakota Office Products

    Uploaded by

    sourabhphanase
    Dakota Office Products was concerned about the inadequacy of its existing pricing system for the current operating environment. It developed an activity-based costing system using 2000 data to calculate activity cost driver rates for each activity like shipping cartons, desktop delivery, order handling, and data entry. The analysis found that Customer A was 6.1% profitable while Customer B was 3% unprofitable due to differences in ordering methods, delivery needs, and account receivables. Switching a major customer to online ordering could lower certain activity cost driver rates and improve Dakota's overall profitability.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    Dakota Office Products

    Customer Profitability Analysis


    Pricing of Products/Services
    ABC in Service

    What concerned John Malone?

    1
    Why was Dakota’s Existing
    pricing system inadequate for
    its current operating
    environment?

    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.

    2
    Lets Find Activities First and
    Match With Costs

    KEY ISSUE TO LEARN IN


    THE CASE:
    Approach used to get the
    information for ABC
    Frustration with the accuracy

    3
    ?
    Cost Pools Activity Allocation

    Process
    cartons in
    and out
    Desktop
    Delivery
    Order
    handling
    Data entry

    Activities and Costs


    Activities Drivers Costs
    Ship Cartons # of Cartons Freight (commercial and own)
    Process Cartons # of cartons Warehouse Costs (Rent,
    Personnel and Distribution)
    Delivery to # of deliveries Delivery Truck and
    Desktop Warehouse Personnel
    Process Manual Order Entry (Processing
    Custom Order System and operators)
    Enter Items # of Lines Order Entry
    (ordered Manual) entered
    Process EDI Per EDI order Order Entry (Quick Check )

    4
    What is profitability of Customer
    A and B?

    Spread Sheet

    5
    Customer Profitability Customer A Customer B
    Sales $103,000 $104,000
    Cost of items purchased 85,000 85,000
    Gross margin $18,000 $19,000
    Number of cartons ordered 200 10,400 200 10,400
    Number of cartons shipped,
    commercial freight 200 1,200 150 900
    Number of desktop deliveries - - 25 5,500
    Number of orders, manual 6 60 100 1,000
    Number of line items, manual orders 60 240 180 720
    Number of EDI orders 6 30 - -
    Average Accounts Receivable $9,000 900 $30,000 3,000
    Customer Contribution (Loss) $5,170 ($2,520)
    6.10% –3.0%

    What explains the difference in


    profitability between two
    customers?

    6
    What are the limitations if any to
    the estimates of profitability of
    the two customers?

    Limitations
    • Transactional drivers assume every carton processed and
    shipped cost the same.
    • Every desktop delivery costs the same could have used
    duration drivers
    • All customers are identical in the time taken to setup an
    order
    • All EDI orders require same degree of efforts for
    validation
    • ABC Depends on subjective estimates
    • Ignores assignment of General and selling expenses

    7
    Is there any additional
    information you would like to
    have to explain the relative
    profitability of the two
    customers?

    • Ignored
    – Large amount of General and selling expenses
    – Customer relationship expenses
    • Should have been allocated in the way
    warehouse expenses are done

    8
    Assume that Dakota applies
    the analysis done (Customer
    Profitability based of ABC) to
    its entire customer base. How
    could such information
    Illuminate and Inspire the
    Dakota managers increase
    company profits?

    • Charge special service such as desktop delivery


    • Encourage customer to switch to EDI
    • Charge interest on O/S
    • Change its customer mix by focusing profits
    • Process improvement opportunities
    • Outsourcing
    • Determine Minimum order size
    • Improve operating efficiency and create unused
    capacity

    9
    Suppose 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 earlier in ABC
    analysis?

    How would the switch affect Dakota’s


    profitability?

    Happy Costing!

    10

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