Dakota Office Products Case
1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
Problems with the current operating environment include:
Profits only when clients placed large orders for cartons
Real drop of profit when many clients place small orders
Wrong cost determination for individual customers
Wrong cost determination for new services provided by
DOP
Dakota Office Product uses traditional costing system where direct and indirect costs are
assigned and allocated to products and services delivered to customers. This is better for
companies where production operations are high labor intensive and overhead costs are smaller
part of total costs. Activity Based Costing is going to be better for Dakota Office Products. They
will be able to calculate the cost of products and services in accordance to the activities involved
and resources consumed.
2. Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000
data. Calculate the activity cost-driver rate for each DOP activity in 2000.
Activity cost-driver rates:
Activity One: process cartons in and out of the facility
Rate=(90% of Warehouse Personnel Expense + Cost of Items Purchased)/cartons processed
Rate=(90%*2,400,000+35,000,000)/80,000= $464.5 /per carton
Activity Two: the new desktop delivery service
Rate=(10% of Warehouse Personnel Expense + Delivery Truck Expenses)/desktop deliveries
Rate=(10%*2,400,000+200,000)/2000= $220 /per carton
Activity Three: order handling
Rate= (Warehouse Expenses + Freight)/ number of orders
Rate=(2,000,000+450,000)/(16,000+8,000)=$102.08 /per order
Activity Four: data entry
Rate=Order entry expenses/Order lines
Rate=800,000/150,000= $5.3 orders/per line
3. Using your answer to Question 2, calculate the profitability of Customer A and Customer B.
Activity Cost driver rate Customer A Customer B
Process cartons in $464.5 per 92,900 92,900
and out of the carton (464.4*200 (464.4*200 cartons)
facility cartons)
The new desktop $220/deskto 5,500
delivery price p deliveries (220*25desktop
deliveries)
Order handling 102.08/per 1,224.96 10,208 (102.08*100
order (102.08*12 orders)
orders)
Data entry 5.3 per line 318 (5.3*60 line 954 (5.3*180 line
item items) items)
Total Cost 94,442.96 1,09,562
Sales 1,03,000 10,4000
Profit 8557.04 (5562)
4. What explains any difference in profitability between the two custom
The increase in cost due to increase in number of both manual and EDI orders has led to lower
profitability of Customer B when compared to Customer A.
5. What are the limitations, if any, to the estimates of the profitability of the two customers?
Limitations include correctly estimating cost pools and correctly determining the cost drivers.
6. Is there any additional information you would like to have to explain the relative profitability
of the two customers?
Knowing the profitability rate could help the company get higher sales per customer. They could
raise the prices of their services for the more profitable customers and cut prices on some
services used by their less profitable customers.
7. 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?
Dakota should do an analysis with all of its customers. This could identify the customers who
they would profit from the most and then they could minimize services to the least profitable
customers and concentrate on the more profitable customers. Also if they did an analysis, they
would figure out that the delivery cost has some issue and the price for desktop delivery should
be adjusted by the distance from the warehouse.
8. 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 Dakota’s profitability?
The activity cost driver rates would increase if the major customer switched. This switch would
increase DOP’s Profits because of less indirect time and activity costs. The manual cost driver
would go down and desktop delivery charge driver would increase.
