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Dakota Office Products Case Study

Dakota Office Products uses a traditional costing system that assigns costs to products and services for customers. This system does not accurately capture costs related to activities and resources used for different customers and services. An activity-based costing system would better determine costs for individual customers and new services based on the resources consumed and activities involved. While Customer B has higher sales, Customer A is more profitable due to lower costs associated with orders and data entry. Dakota Office Products should analyze profitability for all customers to focus efforts on the most profitable accounts.

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Ankit Tiwari
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244 views12 pages

Dakota Office Products Case Study

Dakota Office Products uses a traditional costing system that assigns costs to products and services for customers. This system does not accurately capture costs related to activities and resources used for different customers and services. An activity-based costing system would better determine costs for individual customers and new services based on the resources consumed and activities involved. While Customer B has higher sales, Customer A is more profitable due to lower costs associated with orders and data entry. Dakota Office Products should analyze profitability for all customers to focus efforts on the most profitable accounts.

Uploaded by

Ankit Tiwari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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ACCTG 533 OMBA

Dakota Office Products Case Exhibits

Exhibit 1 Dakota Office Products: Income Statement CY2000


% of cost of items
Sales $ 42,500,000 121.4%
Cost of items purchased 35,000,000 100.0%
Gross margin $ 7,500,000 21.4%
Warehouse personnel expense 2,400,000 6.9%
Warehouse expenses (excluding personnel) 2,000,000 5.7%
Freight 450,000 1.3%
Delivery truck expenses 200,000 0.6%
Order entry expenses 800,000 2.3%
General and selling expenses 2,000,000 5.7%
Interest expense 120,000 0.3%
Net income before taxes $ (470,000) -1.3%

Exhibit 2 Customer Profitability Report (Current Method)


Customer A Cust A % Customer B
Sales $ 103,000 121.2% $ 104,000
Cost of items purchased 85,000 100.0% 85,000
Gross margin $ 18,000 21.2% $ 19,000
Warehousing, Distribution, and Order Entry 12,750 15.0% 12,750
Contrib to gen and sell exp and profit 5,250 6.2% 6,250

Exhibit 3 Services Provided in Year 2000 to Customers A and B


Customer A Customer B
Number of cartons ordered 200 200
Number of cartons shipped commercial 200 150
Number of desktop deliveries - 25
Number of orders, manual 6 100
Number of EDI orders 60 180
Average accounts receivable 6 -
$ 9,000 $ 30,000
Cust B %
122.4%
100.0%
22.4%
15.0%
7.4%
There are many problems with the pricing system for
the current operating environment. Among them
are:
Profits are only seen when clients place large orders
for crates

Wrong cost determination for individual customers


Wrong cost determination for new services that are
to be provided by DOP

Drop in profit when many clients place small orders

DOP uses a traditional costing system wherein they


assign direct and indirect costs to products and
services that are delivered to customers. This
system is better served to companies that have
highly labor intensive production, with lower
overhead costs. Activity based costing would be
better, as they would better be able to calculate the
cost of products and services in relation to resources
consumed and activities involved.
/per line
Profitability
Activity Cost Driver Rate Customer A Customer B
Process Cartons In &
Out of Facility $464.40 $92,880.00 $92,880.00
Desktop Delivery
Price $220.00 $5,500.00
Order Handling $102.08 $1,224.96 $10,208.00
Date Entry $5.30 $318.00 $954.00
Total Cost $94,422.96 $109,542.00
Sales $103,000.00 $104,000.00
Proft $8,577.04 $5,542.00
Customer A Cust A % Customer B

Sales $ 103,000 121.2% $ 104,000

Cost of items purchased 85,000 100.0% 85,000


Gross margin $ 18,000 21.2% $ 19,000
Warehousing, Distribution, and Order Entry 12,750 15.0% 12,750
Contrib to gen and sell exp and profit 5,250 6.2% 6,250

Customer A Customer B
Number of cartons ordered 200 200
Number of cartons shipped commercial 200 150
Number of desktop deliveries - 25
Number of orders, manual 6 100
Number of EDI orders 60 180
Average accounts receivable 6 -
$ 9,000 $ 30,000
Cust B %

122.4%

100.0%
22.4%
15.0%
7.4%
Even though Customer B has more in sales, they
have larger costs associated with both manual and
EDI orders, which led to lower profitability.
Limitations include correctly determining
bothh cost drivers and estimating cost
pools.
I would like to know the profitability rate,
as it could help increase sales numbers for
each customer.
Dakota Office Products should do a profitability
analyis with all of their customers to maximize
efforts for the most profitable customers. They
could also move away from a standard delivery fee
toward a fe based on distance from shipping center.
All cost drivers except for data entry would increase, and DOP
would see increased profits as a result of lowered data entry
costs.

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