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 the 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.
Order Entry $ 5. 30 60 $ 318. 0 180 $ 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 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 on the lack of information. There may be other tangible or intangible pieces of information that may play a significant role in these estimates.
6. Is there any additional information you would like to have to explain the relative profitability of the two customers? Additional information that would be useful around this estimate would include: -Delivery per labor hour -Wages or number of personnel -Number of resources (labor) in each activity
7. Assume that Dakota applies the analysis done in #3 to its entire customer base. How could such information help Dakota managers increase company profits? Dakota managers should revise the desktop delivery pricing to be higher to prevent loss. Customer pricing should be revised based on the number and size of each order. 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 #2? How would the switch affect Dakota’s profitability? This action would affect two areas, order entry and process cartons. The cost per order would decrease as less labor is need for both processing and entry which would result in increased profitability as two out f the four activities would be reduced.