Questions: Dakota Office Products

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

2. Provide a brief analysis of the attached (page 2 of this document) activity-based costing system. Do you agree with the activities and/or cost drivers identified for each activity? Why or why not?

3. Using the activity-based costing system from Question 2, calculate the profitability of Customer A and Customer B. (Hint: This should be a relatively straightforward calculation given the ABC system in Question 2)

4. What explains any difference in profitability between the two customers? What are the limitations, if any, to the estimates of the profitability of the two customers?

5. 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?

OPERATING COSTS$5,850,000

Freight$450,000

Warehouse Rent & Depreciation

$2,000,000

Warehouse Distribution Personnel

$2,400,000

Delivery Truck Expenses$200,000

Order Entry Expenses$800,000

100% 100% 90% 10% 100% 20% 5%

75%

Ship Cartons$450,000

Process Cartons$4,160,000

Deliver to Desktop$440,000

Process Manual

Custom Order$160,000

Enter Items Ordered (Manual)

$600,000

Process EDI Order

$40,000

450/75 = 4,160 / 80 = 440 / 2 = 160 / 16 = 600 / 150 = 40 / 8 =

$6/carton $52/carton $220 / delivery $10 / manual $4 / line $5 / EDI

order order

ORDERS