185 Wang.docx

185 Wang.docx

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185Wang

TableofContents

Issue

1.WhywasDakota'sexistingpricingsysteminadequateforitscurrentoperatingenvironment

2.

a.Whatistheactivity-basedcostsystemforDakotaOfficeProducts（DOP）basedonYear2000data

b.Whatistheactivitycost-driverrateforeachDOPactivityin2000

3.UsingyouranswertoQuestion2,whatwastheprofitabilityofCustomerAandCustomerB

4.Whatexplainsanydifferenceinprofitabilitybetweenthetwocustomers

5.Whatarethelimitations,ifany,totheestimatesoftheprofitabilityofthetwocustomers

6.Isthereanyadditionalinformationyouwouldliketohavetoexplaintherelativeprofitabilityofthetwocustomers

7.

a.AssumethatDakotaappliestheanalysisdoneinQuestion3toitsentirecustomerbase.

b.HowcouldsuchinformationhelptheDakotamanagersincreasecompanyprofits

8.Supposethatamajorcustomerswitchedfromplacingallitsordersmanuallytoplacingallitsordersovertheinternetsite.

a.HowshouldthisaffecttheactivitycostdriverratescalculatedinQuestion2

b.HowwouldtheswitchaffectDakota'sprofitability

Facts

JohnMalone,GeneralManagerofDakotaOfficeProduct（DOP）wasconcernedaboutthefinancialresultsforcalendaryear2000.Despiteasalesincreasefromtheprioryear,thecompanyhadjustsufferedfromthefirstlossinitshistory.Inyear2000,saleswere$42,500,000whichwas121.4%oftheprioryear,butnetincomebeforetaxeswasminus$470,000.

DakotaOfficeProductswasaregionaldistributionofofficesuppliestoinstitutionsandcommercialbusinesses.Itofferedacomprehensiveproductlinerangingfromsimplewritingimplementstospecialtypaperformodernhigh-speedcopiers.DOPhadanexcellentreputationforcustomerservice.DOPoperatedseveraldistributioncentersinwhichpersonnelunloadedtruckloadshipmentsofproductsfrommanufactures,andmovedthecartonsintodesignatedstoragelocationsuntilcustomersrequestedtheitems.

Typically,DOPshippedproductstocustomersusingcommercialtruckers.Recently,DOPhadattractednewbusinessbyofferinga“desktop“optionbydeliveringthepackageofsuppliesdirectlytoindividuallocationsatthecustomer'ssite.Itoperatedasmallfleetoftrucksandassignedwarehousepersonnelasdriverstomakethedesktopdeliveries.Dakotachargedasmallpricepremium（uptoanadditional2%markup）fortheserviceprovidedtocustomers.

DOPorderedsuppliesfrommanydifferentmanufacturers.Itpricedproductstoitsend-usecustomersbyfirstmarkingupthepurchasedproductcostbyabout15%tocoverthecostofwarehousing,distributionandfreight.Thenitaddedanothermarkuptocovertheapproximatecostforgeneralandsellingexpenses,plusanallowanceforprofit.

Dakotahadintroducedelectronicdatainterchange（EDI）in1999,andanewInternetsitein2000,whichallowedcustomerorderstoarriveautomatically.Severalcustomershadswitchedtothiselectronicservicebecauseoftheconveniencetothem.YetDakota'scostscontinuedtorise.

Maloneturnedtohiscontroller,Melissa,andtheywentintothefieldofdistributioncenter.Theyidentifiedfourprimaryactivitiesdoneatthedistributioncenter---processcartonsinandoutofthefacility,thenewdesktopdeliveryservice,orderhanding,anddataentry.

Thereweresomedetails.

Theamountofwarehousespacetheyneededandpeopletomovecartonsjustdependonthenumberofcartons.Allitemshaveaboutthesameinventoryturnoversospaceandhandlingcostsareproportionaltothenumberofcartonsthatgothroughthefacility.

Theyusedcommercialfreightfornormalshipments,andthecostisbasedmoreonvolumethanonanythingelse.Ofcourse,anycartonthattheydeliverthemselves,throughtheirnewdesktopdeliveryservice,avoidsthecommercialshippingcharges.Desktopdeliveryattractedincreasedbusiness,buttheyhadtoasspeoplesinceexistingpersonnelalreadyhadmorethanenoughtodo.

Theynextcheckedontheexpensesofenteringandvalidatingcustomersorderdata.Theorderentryexpensesincludedthedataprocessingsystemandthedataentryoperators.AlltheoperatordidwereenteringthecustomerID,validatingcustomerinformationandandwhatreallymatterswashowmanylinestheoperatorhadtoenter.Thisvaliditychecktalkedaboutthesametimeforallelectronicorders:

itdoesn’tdependonthenumberofitemordered.

MelissaandTimcollectedinformationfromcompanydatabasesandlearnedthefollowing:

Thedistributioncentersprocessed80,000cartonsinyear2000.75,000cartonswereshippedbycommercialfreight.Theremaining5,000wereshippedunderthedesktopdeliveryoption.DOPmade2,000desktopdeliveriesduringtheyear.Thistotalamountofhandling,processingandshippingwasaboutthecapacitythatcouldbehandledwithexistingresources.

Thedataentryoperatorsprocess16,000manualorders,andvalidated8,000EDIorders.The16,000manualordershadanaverageofnearly10itemsperorder,or150,000orderlinesintotal.Dataentryoperatorswereoperatingatcapacityrateswiththeexistingbusiness.

Theyformedtwosmallprojectsteams,onemadeupofdistributioncenterpersonnelandtheotherofdataentryoperators,toestimatetheamountoftimepeoplespentonthevariousactivitiestheyhadidentifies.

Thedistributioncenterteamreportedthat90%oftheworkersprocessedcartonsinandoutofthefacility.Theremaining10%ofworkerswereassignedtothedesktopdeliveryservice.Alloftheotherwarehouseexpenseswereassociatedwiththereceipt,storage,andhandlingofcartons.Thedeliverytruckswereusedonlyfordesktopdeliveryorders.Theseestimateswerefelttoberepresentativeofoperationsnotonlyinthecurrentyear,butinthepastyear（2000）aswell.

Analysis

1.Thedataentryteamlearnedthattheoperatorsworked10,000hoursduringyear2000.2,000hourswerespentinsettingonmanualcustomersorder,7,500hourswerespentinenteringindividualorderlinesinanorder,and500hourswereusedtovalidateanEDOorder.

Melisalllookedthroughthecustomeraccountsandfoundtwotypicalaccountsofsimilarsizeandactivityvolumes.CustomersA&Bhadeachgeneratedsalesinyear2000slightlyabove$100,000.Thecostsoftheproductsorderedwerealsoidentifiedat$85,000.Theoverallmarkups（21.2%forCustomerA,and22.4%forB）wereintherangeofmarkupstargetedbyDOP.Bothcustomershadordered200cartonsduringtheyear.Bothcustomersgeneratedacontributionmarginsufficienttocovernormalgeneralandsellingexpenseandreturnaprofitforthecompany.However,theyweredifferentontheservicedemandsmadeonDakota.CustomerAplacedafewlargeorders,andhadstartedtouseEDItoplaceitsorders.CustomerB,placedmanymoreorders,soitsaveragesizeoforderwasmuchsmallerthanforA.Also,allofB'sorderswerepaperorphoneorders,requiringmanualdataentry;and25%ofB'sordersrequestedthedesktopdeliveryoption.MelissaalsonoticesthatAgenerallypaiditsbillswithin30days,whileBoftentook90ormoredaystopayitsbills.TheaverageaccountsreceivablebalanceduringyearforAwas$9,000,whileitas$3,000forB.Dakotapaidinterestof10%peryear.

2.

a.Whatistheactivity-basedcostsystemforDakotaOfficeProducts（DOP）basedonYear2000data

Therewerefourprimaryactivitiesdoneatthedistributioncenter--processcartonsinandoutofthefacility,thenewdesktopdeliveryservice,orderhandling,anddataentry.Basedonthereportofdistributioncenterteam,90%oftheworkersprocesscartonsinandoutofthefacility,theremaining10%ofworkerswereassignedtothedesktopdeliveryservice.So,forthetotalof$2,400,000warehousepersonnelexpense,$2,160,000（$2,400,000*90%）wouldgotoprocesscartonsand$240,000（$2,400,000*10%）wouldbeexpensesofdesktopdeliveryservice.Alloftheotherwarehouseexpenseswereassociatedwithhandlingofcartons,sowarehouseexpense（excludingpersonnel）Thedeliverytruckswereusedonlyfordesktopdeliveryorders,obviously,aswasshowninexhibit1,deliverytruckexpenseswere$200,000,addedto$240,000,totaldesktopdeliveryexpenseswere$440,000.Abouttheactivityoforderhandling,orderentryexpenseswhichwere$800,000,plus$2,000,000,soexpensesoforderhandlingwouldbe$2,800,000.Thedataentryexpensesincludedthedataprocessingsystemandthedataentryoperators.Becauseoperatorsworked10,000hoursduringyear2000,andorderentryexpenseswere$80,dataentryexpenseperhourwas$80,000.Thus,itcanbeconcludedthatcostsofsetupamanualcustomerorderwere$160,000,enterindividualorderlinesinanorderwere$600,000,andvalidateanEDI/Internetorderwere$40,000.

b.Whatistheactivitycost-driverrateforeachDOPactivityin2000

Cost-driverrateequalsassignmentdividedbyactivityquantity.

PrimaryActivity

Activityindetails

Assignedcost

Activityquantity

Cost-driverrate

Processcartonsinandoutoffacility

Warehousepersonnel（90%）

$2,160,000

$80,000

$464.5

percarton

Costofitemspurchased

35,000,000

Desktopdeliveryservice

Warehousepersonnel（10%）

240,000

2000

$220

percarton

Deliverytruck

200,000

Orderhandling

Freight

450,000

24,000

$102.08

perorder

Warehouseexpense（excludingpersonnel）

2,000,000

Dataentry

Orderentryexpense

800,000

150,000

5.33

Perline

Dataentryoperators

Setupamanualcustomerorder

160,000

10,000

$80

perhour

Enterindividualorderlinesinanorder

600,000

ValidateanEDI/Internetorder

40,000

3.Becausethenumberofcartonsorderedhadbeengivenandcost-driverratefromquestion2,warehouse,distributionandorderentryexp