The upper management group of Dakota, an office products supplier, is worried about the firm'snovelhurtsince it began operations. Looks into the part of activity based costing and customer profitability estimation in a supplierfirm. Dakota's clients are gradually expecting increasingly refined and skillful facilities, for example desktop delivery. Additionally, compared to a few clients who have converted to electronic order placement, others continue to have order placements through the manual procedure. Pricing is grounded on a fixed profit percentage of the cost of the brought item. The supervisors are of the impression the inflexible markups may have been associated with processing the manual orders and desktop delivery. The financial manager commences an attempt to approximate the costs of managing the different orders types so that she is able to approximate the revenues that will be generated by each individual customer underpinned through the real order trend and pattern.
Cost Drivers, Activity Cost, Cost Driver Rate
Services Provided to Customer A and Customer B
Customer A, Customer B
Total Number Of Each Cost Driver
Product Cost using ABC Costing
1. Why was Dakota?s existing pricing system inadequate for its current operating environment?
2. Provide a brief analysis of the attached (page 2 of this document) activity-based costing system. Do you agree with the activities and/or cost drivers identified for each activity? Why or why not?
3. Using the activity-based costing system from Question 2, calculate the profitability of Customer A and Customer B. (Hint: This should be a relatively straightforward calculation given the ABC system in Question 2)
4. What explains any difference in profitability between the two customers? What are the limitations, if any, to the estimates of the profitability of the two customers?
5. 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?