1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
Dakota Office Products (DOP) priced products to its customers by first marking up the purchased product cost by about 15% to cover the cost of warehousing, distribution, and freight. Next, DOP added another markup to cover the approximate cost for general and selling expenses and allowance for profit. Profits increased only when customers placed large orders and had a large drop in profit when many clients placed small orders. Wrong cost determination is given to individual customers as well as new DOP services.
The pricing system for DOP is inadequate for its current operating environment because each customer required different product ordering and distribution ways which cost differently. These costs that were considered in the product pricing strategy were not accurately assigned to each order and needed to be reallocated. In order to set up a better pricing strategy, we need to set up an activity based costing method to figure out cost and profitability for DOP. DOP should switch from a traditional costing system to an activity based costing system.
2. Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000data. Calculate the activity cost-driver rate for each DOP activity in 2000.
Activity cost driver rates:
Activity 1: Process cartons in and out of the facility
Rate= 90% of Warehouse Personnel Expense + Cost of Items Purchasedcartons processed
Rate= 90%*2,400,000+35,000,00080,000= $464.5 per carton
Activity 2: The new desktop delivery service
Rate= 10% of Warehouse Personnel Expense + Delivery Truck Expensesdesktop deliveries
Rate= 10%*2,400,000+200,0002000= $220 per carton
Activity 3: Order handling
Rate= Warehouse Expenses+Freightnumber of orders
Rate= 2,000,000+450,00016,000+8,000=$102.08 per order
Activity 4: Data entry
Rate= Order entry expensesper Order lines