Needing help on the last two question from Dakota Harvard case:

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 the year 2000 data. Calculate the activity cost-driver rate 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 Dakota applies the analysis done in Question 3 to its entire customer base. How could such information help Dakota managers increase company profits?

Suppose that a major customer switched from manually placing all its orders 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 Dakota's profitability?

John Malone, General Manager of Dakota Office Products (DOP) was concerned about the financial results for calendar year 2000 . Despite a sales increase from the prior year, the company had just suffered the first loss in its history (see summary income statement in Exhibit 1). Dakota Office Products was a regional distributor of office supplies to institutions and commercial businesses. It offered a comprehensive product line ranging from simple writing implements (such as pens, pencils, and markers) and fasteners to specialty paper for modern high-speed copiers and printers. DOP had an excellent reputation for customer service and responsiveness. DOP operated several distribution centers in which personnel unloaded truckload shipments of products from manufacturers, and moved the cartons into designated storage locations until customers requested the items. Each day, after customer orders had been received, DOP personnel drove forklift trucks around the warehouse to accumulate the cartons of items and prepared them for shipment. Typically, DOP shipped products to its customers using commercial truckers. Recently, DOP had attracted new business by offering a "desk top" option by delivering the packages of supplies directly to individual locations at the customer's site. Dakota operated a small fleet of trucks and assigned warehouse personnel as drivers to make the desktop deliveries. Dakota charged a small price premium (up to an additional 2% markup) for the convenience and savings such direct delivery orders provided to customers. The company believed that the added price for this service could improve margins in its highly competitive office supplies distribution business. DOP ordered supplies from many different manufacturers. It priced products to its end-use customers by first marking up the purchased product cost by about 15% to cover the cost of warehousing, distribution, and freight. Then it added another markup to cover the approximate cost for general and selling expenses, plus an allowance for profit. The markups were determined at the start of each year, based on actual expenses in prior years and general industry and competitive trends. Actual prices to customers were adjusted based on long-term relationships and competitive situations, but were generally independent of the specific level of service provided to that customer, except for desk top deliveries. Dakota had introduced clectronic data interchange (EDI) in 1999, and a new internet site in 2000, which allowed customer orders to arrive automatically so that clerks would not have to enter customer and order data manually. Several customers had switched to this electronic service because Professor Robert 5 . Kaplan prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright (1) 2001 President and Fellows of Harvard College. To onder copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Rusines School Publishing. Boston, MA 02163 , or go to http://wwwhbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any fotm or by any means-electrotic, mecharical, photocopying, recording, or otherwise without the permission of Harvard Rusiness School. Dakota Office Products 102021 - The distribution centers processed 80,000 cartons in year 2000. Of these, 75,000 cartons were shipped by commercial treight. The remaining 5,000 cartons were shipped under the desktop delivery option. DOP made 2,000 desktop deliveries during the year. - People felt this total amount of handling, processing and shipping was about the capacity that could be handled with existing resources. - The data entry operators processed 16,000 manual orders, and validated 8,000 EDI orders. The 16,000 manual orders had an average of nearly 10 items per order, or 150,000 order lines in total. As with the carton handling, shipping, and delivery personnel, supervisors felt that the data entry operators were operating at capacity rates with the existing business. They then formed two small project teams, one made up of distribution center personnel and the other of data entry operators, to estimate the amount of time people spent on the various activities they had identified. The teams conducted interviews, asked some people to keep track of their time for several days, and observed other people as they went about their daily jobs. The distribution center team reported that 90% of the workers processed cartons in and out of the facility. The remaining 10% of workers were assigned to the desktop delivery service. All of the other warehouse expenses (rent, building and equipment depreciation, utilities, insurance, and property taxes) were associated with the receipt, storage, and handling of cartons. The delivery trucks were used only for desktop delivery orders. These estimates were reviewed by supervisors and felt to be representative of operations not just in the current year, but in the past year (2000) as well. The data entry team, from monitoring computer records, learned that operators worked 10,000 hours during year 2000. Further analysis of the records revealed the following distribution of time for each of the activities performed by data entry operators. Understanding Customer Profitability Melissa looked through the customer accounts and found two typical accounts of similar size and activity volumes. Customers A and B had each generated sales in year 2000 slightly above $100,000. The costs of the products ordered were also identical at $85,000. The overall markups (21.2\% for Customer A, and 22.4% for B) were in the range of markups targeted by Dakota Office Products. The markup for Customer B was slightly higher because of the premium charges for desktop delivery. Both customers had ordered 200 cartons during the year. The existing customer profitability system (see Exhibit 2) indicated that both customers generated a contribution margin sufficient to cover normal general and selling expenses and return a profit for the company. Melissa noticed, however, that the two accounts differed on the service demands made on Dakota. Customer A placed a few large orders, and had started to use EDI to place its orders (half its orders, in year 2000 , arrived electronically). Customer B, in contrast, placed many more orders, so its average size of order was much smaller than for Customer A. Also, all of Customer B's orders were either This document is authorized for use only by nicholas ho in WSU OMBA ACCTG 533 - Spring 2023 taught by Michael Petersen, Washington State University from Dec 2022 to Jun 2023. For the exclusive use of n. ho, 2023. Dakota Office Products 102021 Exhibit 2 Customer Profitability Report (Current Method) Exhibit 3 Services Provided in Year 2000 to Customers A and B John Malone, General Manager of Dakota Office Products (DOP) was concerned about the financial results for calendar year 2000 . Despite a sales increase from the prior year, the company had just suffered the first loss in its history (see summary income statement in Exhibit 1). Dakota Office Products was a regional distributor of office supplies to institutions and commercial businesses. It offered a comprehensive product line ranging from simple writing implements (such as pens, pencils, and markers) and fasteners to specialty paper for modern high-speed copiers and printers. DOP had an excellent reputation for customer service and responsiveness. DOP operated several distribution centers in which personnel unloaded truckload shipments of products from manufacturers, and moved the cartons into designated storage locations until customers requested the items. Each day, after customer orders had been received, DOP personnel drove forklift trucks around the warehouse to accumulate the cartons of items and prepared them for shipment. Typically, DOP shipped products to its customers using commercial truckers. Recently, DOP had attracted new business by offering a "desk top" option by delivering the packages of supplies directly to individual locations at the customer's site. Dakota operated a small fleet of trucks and assigned warehouse personnel as drivers to make the desktop deliveries. Dakota charged a small price premium (up to an additional 2% markup) for the convenience and savings such direct delivery orders provided to customers. The company believed that the added price for this service could improve margins in its highly competitive office supplies distribution business. DOP ordered supplies from many different manufacturers. It priced products to its end-use customers by first marking up the purchased product cost by about 15% to cover the cost of warehousing, distribution, and freight. Then it added another markup to cover the approximate cost for general and selling expenses, plus an allowance for profit. The markups were determined at the start of each year, based on actual expenses in prior years and general industry and competitive trends. Actual prices to customers were adjusted based on long-term relationships and competitive situations, but were generally independent of the specific level of service provided to that customer, except for desk top deliveries. Dakota had introduced clectronic data interchange (EDI) in 1999, and a new internet site in 2000, which allowed customer orders to arrive automatically so that clerks would not have to enter customer and order data manually. Several customers had switched to this electronic service because Professor Robert 5 . Kaplan prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright (1) 2001 President and Fellows of Harvard College. To onder copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Rusines School Publishing. Boston, MA 02163 , or go to http://wwwhbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any fotm or by any means-electrotic, mecharical, photocopying, recording, or otherwise without the permission of Harvard Rusiness School. Dakota Office Products 102021 - The distribution centers processed 80,000 cartons in year 2000. Of these, 75,000 cartons were shipped by commercial treight. The remaining 5,000 cartons were shipped under the desktop delivery option. DOP made 2,000 desktop deliveries during the year. - People felt this total amount of handling, processing and shipping was about the capacity that could be handled with existing resources. - The data entry operators processed 16,000 manual orders, and validated 8,000 EDI orders. The 16,000 manual orders had an average of nearly 10 items per order, or 150,000 order lines in total. As with the carton handling, shipping, and delivery personnel, supervisors felt that the data entry operators were operating at capacity rates with the existing business. They then formed two small project teams, one made up of distribution center personnel and the other of data entry operators, to estimate the amount of time people spent on the various activities they had identified. The teams conducted interviews, asked some people to keep track of their time for several days, and observed other people as they went about their daily jobs. The distribution center team reported that 90% of the workers processed cartons in and out of the facility. The remaining 10% of workers were assigned to the desktop delivery service. All of the other warehouse expenses (rent, building and equipment depreciation, utilities, insurance, and property taxes) were associated with the receipt, storage, and handling of cartons. The delivery trucks were used only for desktop delivery orders. These estimates were reviewed by supervisors and felt to be representative of operations not just in the current year, but in the past year (2000) as well. The data entry team, from monitoring computer records, learned that operators worked 10,000 hours during year 2000. Further analysis of the records revealed the following distribution of time for each of the activities performed by data entry operators. Understanding Customer Profitability Melissa looked through the customer accounts and found two typical accounts of similar size and activity volumes. Customers A and B had each generated sales in year 2000 slightly above $100,000. The costs of the products ordered were also identical at $85,000. The overall markups (21.2\% for Customer A, and 22.4% for B) were in the range of markups targeted by Dakota Office Products. The markup for Customer B was slightly higher because of the premium charges for desktop delivery. Both customers had ordered 200 cartons during the year. The existing customer profitability system (see Exhibit 2) indicated that both customers generated a contribution margin sufficient to cover normal general and selling expenses and return a profit for the company. Melissa noticed, however, that the two accounts differed on the service demands made on Dakota. Customer A placed a few large orders, and had started to use EDI to place its orders (half its orders, in year 2000 , arrived electronically). Customer B, in contrast, placed many more orders, so its average size of order was much smaller than for Customer A. Also, all of Customer B's orders were either This document is authorized for use only by nicholas ho in WSU OMBA ACCTG 533 - Spring 2023 taught by Michael Petersen, Washington State University from Dec 2022 to Jun 2023. For the exclusive use of n. ho, 2023. Dakota Office Products 102021 Exhibit 2 Customer Profitability Report (Current Method) Exhibit 3 Services Provided in Year 2000 to Customers A and B