1 Question: Prepare a conclusion based on the given information?

Background

Dakota Office Products (DOPgeneral )'s manager was concerned about the company's financial performance for year 2000. The income statement shows that, despite an increase in sales from the previous year, the company had made its first ever loss. DOP is a supplier of office supplies with a diverse product portfolio. DOP was well-known for its great customer service and quick response times. It had a number of distribution facilities, each with storage and shipments awaiting client orders. DOP generally distributes orders via commercial trucks, but has recently garnered new business by offering a "desk top" alternative, this entails delivering material packages to precise areas at the clients premises.

In order to improve profits in its highly competitive market, the corporation charges a premium pricing % for the service. Prices are set for final consumer by first marking up the purchase price by roughly 15% to cover storage, distribution, and freight costs. Then there's a charge for administrative and selling costs, along with profit. Pricing is changed based on the nature of the connection and the competition. Dakota began using electronic data interchange (EDI) in 1999 and launched a new website in 2000, allowing for an automatic ordering system without the need for human data entry. Dakota's expenditures continued to rise despite these attempts.

John Malone was anxious since the business was losing money. He desired to make a conscious effort to reclaim profit. To assess the distribution centres and facilities operations, Melissa Dunhill, John Malone's controller, and Tim Cunningham, his head of operations, were contacted. They devised four key tasks: processing boxes into and out of the centre, operating the new desk top delivery service, order processing, and data entry.The storage of cartons required space, and the amount of cartons sent in and out of the facility required turnover. Regardless of weight or distance, commercial freight for regular shipments was based largely on volume.

Additionally, most additional computer products were exempt from corporate shipping costs. Malone with his colleagues kept calculating the costs of data acquisition. Purchases were manually entered, but system and digitally orders were automatically entered, eliminating the need for manual data entry. Ordering and shipping information for the year had been obtained from company databases.

The quantity of handling, processing, and shipping, according to the employees, was at full capacity. 16,000 manual orders were completed, and 8,000 EDI orders were validated by the data entry staff. To examine the distribution centre and data entry department activities, two small project teams were organised. 90% of orders are processed in the distribution centre, with 10% of orders processed on the desktop. Other logistic expenses were incurred not just in the current year, as well as in the preceding year. The data capture employees put in 10,000 hours over the course of the year, split evenly between each activity, with the majority of hours spent processing individual order lines.

Dunhill proceeded to examine client accounts in order to determine whether the quantity of revenues generated was sufficient to pay general and selling expenditures while still allowing the firm to remain profitable. Dunhill was concerned about service expectations for the second account, which resulted in higher servicing for the desired orders.

The existing costing method was insufficient since it failed to account for all costs, including interest on accounts receivable. ABC (activity-based costing) is a useful technique that focuses on the entire expenses incurred so that management may make better decisions. By identifying the areas that need to be addressed, the ABC approach may enhance the company's overall efficiency.

Problem statements:

1. Overall Performance: DOP's financial statement demonstrates that the company lost money in 2000, owing to a fall in profit margins despite increased sales. This is mostly due to the continued use of the current costing system, a lack of operational data, pricing policies, and debt collection policies.

2. Traditional Costing System: Because TCS is based on historical expenses; it is inflexible in the face of new service offerings and order processing modifications. As a result, the corporation creates an insufficient analysis of service profitability and implements an insufficient operating structure in distribution centers. For instance, the system mistakenly assigns 10% warehouse personnel expenses and increased utilization of trucks as the additional cost for the new desktop delivery service. The old system fails to alert managers that the new service is significantly more expensive than the conventional service, and thus managers do not make operational decisions to handle the higher cost, resulting in a financial loss.

3. Operations Information: The director of operations doesn't know what happens inside the distribution centers, which makes it hard to figure out what costs money. When the cause-and-effect relationship isn't clear, it will lead to inefficient product mix decisions and, as a result, profit decreased.

4. Pricing Policy: DOP's present pricing policy (Appendix A) does not establish causal links between cost drivers, indirect distribution, and order input overheads (Appendix B). It is opposed to the implementation of an improved internal system, as detailed in Appendix A. Due to the absence of cost allocation bases, indirect activity pools incur overhead expenses. This results in the same pricing assignment for customer A and customer B, regardless of the service requested by each client.

5. Debt collection: Another factor contributing to this issue is Customer B's exceptionally high accounts receivable, which they consistently fail to pay in a timely manner. This is noteworthy because DOP already pays a ten percent annual interest rate on its working capital line of credit. With a large accounts receivable balance, DOP exposes itself to risks associated with the possible default of indebted enterprises, as well as the effects of past-due bills on DOP's cash flows, thus necessitating a greater reliance on financing for future initiatives.

Customer profitability= Total sale to a customer-Total cost incurred with a customer

Total sale to each customer is given in Exhibit 2. So, we need to find out total cost incurred with each cartoon, each customer, each order and each order line.

For ABC costing, we have to first find out the unit cost for each activity.

Cost incurred in processing cartons in and out of the facility:

90% of the workers processed cartons in and out of the facility.

Here, cost= [(90% of warehouse personnel expense) + Cost of items purchased]/No. of cartons

= [(0.9 X 24, 00,000)+ 3,50,00,000]/80,000

= $464.5 per carton

Cost incurred in processing desktop delivery:

10% of the workers were involved in processing cartons by desktop delivery.

Here, cost= [(10% of warehouse personnel expense) + delivery truck expense]/No. of cartons

= [(0.1 X 24,00,000) + 2,00,000]/2000

= $220 per carton

Cost incurred in order handling:

Cost= (Warehouse expense+Freight)/No. of orders = (20,00,000 + 4,50,000)/ (16,000+8,000)

= $102.08 per carton

Cost incurred in data entry:

Cost= Order entry expense/Order lines = 8,00,000/1,50,000 = $5.33 per line

Contribution for general and selling expense (both for customer A & B)

= [Number of cartons ordered X (general & selling expenses + interest expenses)]/No. of cartons processed

= [200 X (20,00,000+1,20,000)]/80,000

= $5300

Total cost involved with customer A:

Activity	Cost driver rate, $	Quantity,	Cost, $
Processing cartons in and out of the facility	464.5	200	92900
Processing desktop delivery	220	-	-
Order handling	102.08	6	612.48
Data entry	5.33	60	319.8

Hence, total processing cost for customer A= $93832.28

Profitability for customer A:

Profit=Total sale to customer A-total cost involved with customer A

= 103000- (93832.28+5300) = $3867.72

So, company is having profit in case of selling to customer A.

Total cost involved with customer B:

Activity	Cost driver rate, $	Quantity,	Cost, $
Processing cartons in and out of the facility	464.5	200	92900
Processing desktop delivery	220	25	5500
Order handling	102.08	100	10208
Data entry	5.33	180	959.4

Hence, total processing cost for customer B= $109567.4

Profitability for customer B

Profit= Total sale to customer B-total cost involved with customer B

= 104000-(109567.4+5300)

= $(10867.4)

So, the company is suffering loss in case of selling to customer B.

Question: Prepare a conclusion based on the given information?