Dakota Office Products Team Case Study
Tae Akagi, Shannan Kammann, Skyler Ross, David Santillan
OMBA, Carson College of Business
ACCTG 533: Performance Measure & Controls
March 19, 2023
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This case study by Robert Kaplan discusses the business environment faced by Dakota
Office Products (DOP). DOP was a regional distributor of office supplies to institutions and
commercial businesses during the early 2000s (Kaplan, 2005). DOP was struggling through
changes during this time because of innovations powered by modern technology and the internet.
To keep up with its competitors, DOP introduced desktop delivery, online ordering, and
electronic order entry (Kaplan, 2005). DOP hoped that these enhanced offerings and internal
processes would help regain profitability and change the trajectory of DOP. However, the results
were unclear and further analysis must be conducted to determine if the changes made by DOP
resulted in profitability.
1. DOP's existing pricing system is not adequate because its markups all its customers in the
same manner, without considering the actual cost of products. Moreover, DOP does not
differentiate its customers by order size, order method, or delivery method. For example, DOP
has two delivery methods: commercial freight and Desktop Delivery. These two delivery
methods operate vastly differently and have vastly different cost margins. However, DOP’s
existing pricing system does little to materially differentiate from these delivery methods (the
markup is only an additional 2%). In summary, due to DOP’s simple markup pricing system, it is
not able to accurately differentiate between its profitable and unprofitable customers.
2. The seven main activities at DOP’s distribution centers are processing cartons in and out of
facilities, desk top delivery service, commercial freight order handling, manually processing
custom orders, entering individual order lines, validating EDI/internet orders, and interest cost on
accounts receivable. The cost-drivers for each activity are the number of cartons processed,
number of Desktop Deliveries, number of orders, number of manual orders, number of line
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items, number of internet orders, and interest rate, respectively. Therefore, the activity cost-
driver rates of each are as follows for the year 2000:
# Activity Rate
1 Processing of Cartons $52/carton
2 Processing of Cartons In and Out of $464.50/carton
Facilities
3 Desk Top Delivery Service $220/delivery
4 Commercial Freight Order Handling $6/carton
5 Manual Custom Orders $10/order
6 Entering Individual Order Lines $4/line item
7 Validating EDI/Internet Orders $5/internet order
8 Interest Cost on Accounts Receivable 10%
Exhibit 1 shows the calculations used to determine the rate for each activity.
3. The profitability of Customer A is $5,170 and the profitability of Customer B is -$2,520.
Exhibit 2 shows the calculations used to determine the profitability of Customer A and B.
4. Customer B requires more costs associated with the Desktop Delivery activity and more hours
of data entry operators. Therefore, using Activity-Based Costing, Customer B is incurring a loss
of $2,520 whereas Customer A generates profitability of $5,170 for DOP.
5. Assumptions are that each identified cost driver is the correct cost driver; however, there are
still possibilities that other factors affect the costs of each activity, which will affect the accuracy
of the estimate.
6. Financial statements of both companies can be helpful information to obtain to assess the
fiscal status of these companies. This will enable us to understand if they are in good financial
standing to pay the amounts in the Accounts Receivable. Other useful information would be
industry information about these companies because it can help us forecast the profitability of
doing business with these companies and therefore determine the longevity of our relationship
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with them. Another factor is the cost associated with automating the input of data entry to reduce
manual input of data. Finally, are there alternatives to Desktop Deliveries? Commented [SD1]: I dont think we need this.
7. Activity analysis helps managers identify customers who are the most profitable and which are
costing the company. Managers can then prioritize their marketing and sales activities to attract
more business from the “angels” and avoid the “devils.” Managers will also be able to evaluate
activities based on how they serve the needs of products or customers, and their efficiency.
Activities which are costing the company but are not required to meet a specification, satisfy a
customer demand, sustain the organization or otherwise are beneficial to the firm can be
eliminated to reduce costs. It also shows managers which activities are responsible for the most
cost and which might present opportunities for improvement.
8. As can be seen in Exhibit 1 the activity rate of manual custom orders is $10 per order, while
validating EDI/ Internet orders is $5 per internet order. If a major customer switched from
manually placing all its orders to placing all its orders over the internet, the activity cost per
order validation would be half as much, and profitability would increase.
In summary, the markup forced DOP’s profitable customers to cross-subsidize less
profitable customers. Using activity-based costing makes DOP more competitive because they
can determine what the associated costs of activities are and how profitable customers are. This
allows them to prioritize attracting business from their more profitable customers, improve their
cost structure by developing activities that cost less, or incentivize customers to use less
expensive activities like ordering online instead of ordering over the phone.
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Appendix:
Exhibit 1: Activity Cost-Driver Rate
Distribution Center
Cost
# Activities Rate
Drivers
rate = (90% of warehouse
personnel expense + warehouse
# of expense) ÷ (# of cartons
1 Processing of Cartons cartons processed)
processed rate = (0.9*$2,400,000 +
2,000,000) ÷ (80,000)
rate = $52/carton
2 Processing of Cartons In and Out of # of rate = (90% of warehouse
Facilities cartons personnel expense + Cost of
processed Items Purchased) ÷ (# of cartons
for the processed)
facility rate = (0.9*$2,400,000 +
35,000,000) ÷ (80,000)
rate = $464.50/carton
3 Desk Top Delivery Service # of rate = (10% of warehouse
deliveries personnel expense + delivery
truck expenses) ÷ (# of desk top
deliveries)
rate = (0.1*$2,400,000 +
$200,000) ÷ (2,000)
rate = $220/delivery
4 Commercial Freight Order Handling # of rate = (freight) ÷ (# of
cartons commercial freight orders)
rate = ($450,000) ÷ (75,000)
rate = $6/carton
5 Manual Custom Orders # of rate = (2% of order entry
manual expenses) ÷ (# of orders)
orders rate = (0.2*$800,000) ÷ 16,000
rate = $10/order
6 Entering Individual Order Lines # of line rate = (75% of order entry
items expenses) ÷ (# of line items)
rate = (0.75*$800,000) ÷
(150,000)
rate = $4/line item
7 Validating EDI/Internet Orders # of rate = (5% of order entry
internet expenses) ÷ EDI Orders
orders rate = (0.5*$800,000) ÷ 8,000
rate = $5/internet order
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8 Interest Cost on Accounts Receivable Account rate = interest rate
receivable rate = 10%
rate = 10%
Exhibit 2: Profitability of Customer A and B
Particulars Customer A Customer B
Sales Generated $103,000 $104,000
Cost of Items Purchased $85,000 $85,000
Gross Margin $18,000 $19,000
Cost
Process Cartons $10,400 $10,400
Commercial Freight Order Handling $1,200 $900
Desktop Deliveries $0 $5,500
Manual Ordering $60 $1,000
Enter Individual Order Lines $240 $720
EDI/Internet orders $30 $0
Cost of Accounts Receivable (10% of
outstanding) $900 $3,000
Profitability $5,170 ($2,520)
References:
Kaplan, R. S. (2005). Dakota office products. Harvard Business School.
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