1. 1.Why was Dakotas existing pricing system inadequate for its current operating environment?

The pricing system for DOP is insufficient for its current operating environment because each customer required different product ordering and distribution methods which should cost differently. DOP mark ups did not cover the costs incurred for example setting the same price for manual entry orders and electronic orders while the manual orders consume much more time to process than the electric orders etc. Profit is gained by the customers that made larger orders and very low profit when many client made small orders. Incorrect cost determination is given to individual customers as well as new DOP services etc. Thus DOP should shift to an activity based costing system from traditional costing system.

1. 2.Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000 data. Calculate the activity cost-driver rate for each DOP activity in 2000.

Activity One: Process cartons in and out of the facility

Rate = (90% of Warehouse Personnel Expense + Cost of Items Purchased)/ Cartons processed

Rate = (0.9*2,400,000+35,000,000)/80,000 = 464.5$ (per carton)

Activity Two: the new desktop delivery service

Rate = (10% of warehouse Personnel Expense + Delivery Truck Expense)/ desktop deliveries

Rate = (0.1*2,400,000+200,000)/2000 = 220$ (per carton)

Activity Three: Order handling

Rate = (warehouse Expenses + Freight)/ number of orders

Rate 2,000,000+450,000)/ (16,000+8,000) = 102.08$ (per order)

Activity Four: data entry

Rate = Order entry expenses/order lines

Rate = 800,000/150,000 = 5.3 orders per line

1. 3.Using your answer to Question 2, calculate the profitability of Customer A and Customer B.