Dakota Office Products

788 Words Nov 22nd, 2013 4 Pages
i. Why was Dakota’s existing pricing system inadequate for its current operating environment? (Hint: Consider why ABC might be a good idea)

It is evident in the Dakota Office Products case that there is a wide variety of product created by Dakota that is shipped to their customers. That, paired with the fact that there are high overhead costs related to the desktop delivery option, also tells the reader that an incorrect accounting system is currently being used. One needs only to look at the profitability difference between Customer A & B. Currently, there is no difference in the way that the size of orders are priced. In their current system, only the larger orders create a profit for the customer.

ii. Develop an
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Next we find the amount contributed from each Customer to the overall general and selling expenses based on the number of cartons ordered by each. The end result leads us to each customers overall profitability.

iv. What explains any difference in profitability between the two customers?

The difference in profitability between the two customers is a direct result of the large variance in number of orders between Customer A & B. While Customer A had 12 different orders, Customer B had 100 different orders, which cost nearly $9,000 more than the cost for Customer A. (See Number of Orders cost in section iii.)

v. What are the limitations, if any, to the estimates of the profitability of the two customers? (Hint: Consider what improvements could be made to the accounting system to obtain more accurate costs)

The limitations to the estimates of customer profitability is the fact that we have no idea the distance delivered to each customer. This means that each delivery could cost a separate amount, therefore not bringing us to an effective delivery cost based on labor hours.

vi. Is the current 2% price premium adequate to cover the cost of the desktop delivery?

No because, as shown with Customer B, when many small orders are placed, it is actually costing Dakota more. Though this service is attracting new customers, it is also creating more orders which negatively affects the profits of Dakota.
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