Blue Office Products

In 2018, Blue Office Products (BOP) was a corporation with annual sales of $900 million in business forms and specialty paper products, such as writing paper, envelopes, note cards, and greeting cards. In 2014 the company had expanded into business forms inventory management services. This was an area where BOP believed it could offer value-added services to differentiate it from other business forms manufacturers. The forms manufacturing business was mature by 2014, and all competitors were seeking ways to generate sales growth. BOP created a VIP service for its corporate clients mainly in downtown Toronto, the services provided included warehousing and distribution of forms (including inventory financing). As part of its distribution services, they offered a "pick pack" service where trained workers actually opened full cartons shipped by the BOP to VIP to pick the exact number of forms requested by the clients. For a small number of clients, it was also offered "desktop delivery," where VIP personnel would distribute the forms to individual offices (forms were usually delivered only to the loading dock). BOP operated its forms manufacturing and VIP service activities as separate profit centers.

Current Cost Accounting System

Clients who participated in the forms management program kept an inventory of forms at the downtown Toronto BOP's distribution center. The forms were distributed to the client as needed. The client was charged a service fee of 32.2% of the cost of sales to cover the cost of warehousing and distribution, regardless of the specific level of service provided to that client (see Exhibit 1). The sales-force then marked up the cost of product and services by 20 percent

EXHIBIT 1: Calculation of Service Fee Charges (000s) applicable in 2018 Year Concept Total Cost % of product cost 2016 Product sales at cost $24,059 2016 Warehousing/distribution expense $ 4,932 20.5% 2016 Total cost of inventory financing $ 1,131 4.7% 2016 Total freight charges $ 1,684 7% Total services costs 32.2% Standard price (Product cost x 1.32) x 1.2EXHIBIT 3: Activity Based Costs - Calculation of Service Costs Value Added Total FY2018 Expense Cost Driver Cost Driver Service Cost Activities Defined as: per activity (000) Defined unitsFY2018 per year Storage $1,550 Cartons in Inv. $350,000 $4.43 Requisition Handling 1,801 Requisitions 310,000 $5.81 Warehouse Activity 761 Carton Lines 775,000 $0.98 Pick Packing 734 (PP) Lines 700,000 $1.05 Data Entry 612 Carton Lines 775,000 $0.79 Desk Top Delivery 250 Per Time 8,333 $30.00 $5,708 Freight Charge Actual Cost Inventory Finance Inventory Value x Capital Charge* * Assume Cost of Capital = 13.5% given that prime rate is 10%EXHIBIT 4: BOP Net Sales. 201 '1" Annual Sales! Account Number of Accounts '56 of BOP Net Sales > $ 300,000 40 48% > $150,000 53 19 > $ T5.000 86 15 > $ 30.000 143 11 > $0 178 ? Total 1.100 100% EXHIBIT 2: Breakdown of Expenses by Activity (000s) in 2016 Total Expense Activity Costs * Rent (85%) $1,424 x 0.85 $1,211 Depreciation (85%) $ 208 x 0.85 $ 177 Utilities (85%) $ 187 x 0.85 159 Security $ 3 3 Total storage expense $1,550 Rent (15%) $1,424 x 0.15 $ 214 Depreciation (15%) $ 208 x 0.15 31 Utilities (15%) 187 x 0.15 28 Salaries & fringes CA 909 909 Telephone $ 96 96 Taxes/insurance $ 104 104 Travel/entertainment (75%) 40 x 0.75 30 Postage 56 56 Hourly payroll & fringes 316 316 Temp help 15 15 Total requisition handling expense $1,801 Variable warehouse pay & fringes $1,735 $1,735 Travel and entertainment (25%) $ 40 x 0.25 $ 10 Total warehouse activity (to be distributed among 3 activities) $1,745 Basic warehouse stock selection (44%) $ 761 Pick pack activity (42%) 734 Desktop delivery (14%) $ 250 Data Processing expense $ 612 $ 612 Total $5,708 $5,708 *Some expense items were allocated between activities