Team 10: DAKOTA OFFICE PRODUCTS 1

Dakota Office Products – Case Study Analysis

FAC203 – Managerial Accounting

Professor MB Ragupathy

Team 10

Aarnav Pande

Aman Mishra

Gina Nemade

Shagnik Roy
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Dakota Office Products – Case Study Analysis

Case Background

Dakota Office Products is a merchandising company managed by John Malone, the

General Manager. DOP is a regional distributor of office supplies to commercial businesses. This

company has introduced the Electronic Data Interchange in year 1999 and a new internet set in

2000. This is to provide convenience to customers in making orders and delivery of products.

The launching of electronic of services was believed to improve the company’s profit margin but

despite of increase in sales, actual financial result of operation of operation for the year 2000

were reported to the net loss.

Why was Dakota’s existing pricing system inadequate for the current operating

environment?

Some problems with the current operating environment include:

 Profits only when clients placed large orders for cartons

 Real drop of profit when many clients place orders

 Wrong cost determination for individual customers

 Wrong cost determination for new services provided by Dakota Office Products

Dakota Office Products uses a traditional costing system in which direct and indirect

costs are assigned and allotted to products and services offered to customers. This is suitable for

companies where production operations are labor intensive and overhead costs are a small part of

total costs. Dakota office products are superior in activity-based costing. They require a system

to calculate the cost of products and services depending on the activities involved and the

resources consumed.
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The company's existing price structure is that the company adds a price to the cost of the

product. The company uses a 15% markup to combine warehouse, distribution and freight. The

price is marked up again to cover general and selling expenses, then a profit reserve is added to

the cost of the product, and the price is set for the product. These markups used were not

calculated based on current expenses that occurred during operations, these markups were based

on expenses incurred last year. However, desktop deliveries have an extra markup.

Product costing systems are inefficient because companies do not keep abreast of

possible cost drivers for products. The possible costs at the time of sale have not yet been

determined. Companies need to review the product's possible cost centers in order to measure

costs reliably. Costs can then be allocated to manual and desktop orders accordingly based on the

number of orders placed by the customer

Developing an activity cost-driver rate for Dakota Office Product (DOP) based on year

2000 data.

Customer Profitability Report

Using the cost driver rate, we can calculate the customer profitability report.
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Because Customer A is placing a large number of small orders, this customer is more

profitable than other customers. Customer A's profit margin is also low because his credit does

not last more than a month.

Customer B makes small orders. Due to this nature, Dakota Office Products incurs higher

costs through more shipping and handling costs. However, due to a lack of cost analysis within

the company, Customer B has a higher profit margin than Customer A. The company is suffering

losses by selling to Customer B. Another disadvantage of selling to Customer B is that the

customer pays back within 90 days, which increases the company’s working capital interest on

its product.

The main reasons for the difference in profitability between the two customers are the

method and cost of delivery to the desk and the processing of manual orders for Customer B

versus Customer A. The increase in cost due to the increase in both manual and EDI orders

resulted in a decrease in customer B's profitability compared to customer A.

Desktop delivery costs reduce the profitability of these customers by applying a fixed

cost of delivery truck costs to their desktop deliveries. Using the Dakota truck fleet in other

activities to reduce the portion of truck delivery charges applied to these customers.

Recommendation

Difference 1

 Desktop delivery costs (applying to customers who used fixed delivery truck costs

for desktop delivery would reduce the profitability of these customers)

Recommendations

 Transported by commercial trucks only

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 Use the Dakota truck fleet for other purposes to reduce the share of truck delivery

expenses for these customers

Difference 2

 The cost of manual orders and the cost of entering items manually

Recommendations

 Increase Customer B's pricing to cover losses from this activity

 Encourage Customer B to place orders using EDI and the Internet by offering

Customer B a competitive price when using these tools.

 Encourage Customer B to place bulk orders instead of small orders, this will save

processing time for manual orders