The upper management group of Dakota, an office products supplier, is worried about the firm's novel hurt since it began operations. Looks into the part of activity-based costing and customer profitability estimation in a supplier firm. 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.
Data entry time per activity
Dakota Office Products: Income Statement CY2000
Activity Cost drivers
Contribution to General and Selling expenses and Profits
Why was Dakota’s existing pricing system inadequate for its current operating environment? Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000 data. Calculate the activity cost-driver for each DOP activity in 2000.
Using your answer to Question 2, calculate the profitability of Customer A and Customer B.
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?
Is there any additional information you would like to have to explain the relative profitability of the two customers?
Assume that DOP applies the analysis done in Question 3 to its entire customer base. How could such information help the DOP managers increase company profits?
Suppose that a major customer switched from placing all its orders manually to placing all its orders over the internet site. How should this affect the activity cost driver rates calculated in Question 2? How would the switch affect DOP’s profitability?