Dakota Office Products
Total Words: 1529
Data entry time per activity
Dakota Office Products: Income Statement CY2000
Activity Cost drivers
Contribution to General and Selling expenses and Profits
Dakota Office Products (DOP) Company was a distributor of office supplies to different businesses. It had a comprehensive product line. Its products ranged from simple writing material to high speed copier. It had gained a good reputation in the market due to its customer service and responsiveness. In 2000, it realized that, despite the increase in orders, it is incurring a loss. The pricing policy at the time was to charge 15% markup over the purchased product cost. The following analysis shows that the costing and pricing system is incorrect. Activity based costing should be used for better analysis and pricing decision. Six activities have been identified with relevant cost drivers. This costing method facilitates in comparing customers. Furthermore, recommendations are made to discontinue desktop deliveries and manual ordering. Furthermore, it should encourage customers to order in bulk so as to reduce the cost of ordering.
- Why was Dakota’s existing pricing system inadequate for its current operating environment? Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000 data. Calculate the activity cost-driver for each DOP activity in 2000.
- Using your answer to Question 2, calculate the profitability of Customer A and Customer B.
- 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?
- Is there any additional information you would like to have to explain the relative profitability of the two customers?
- Assume that DOP applies the analysis done in Question 3 to its entire customer base. How could such information help the DOP managers increase company profits?
- 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 Question 2? How would the switch affect DOP’s profitability?