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Dakota Office Products

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i. Why was Dakota’s existing pricing system inadequate for its current operating environment? (Hint: Consider why ABC might be a good idea)

It is evident in the Dakota Office Products case that there is a wide variety of product created by Dakota that is shipped to their customers. That, paired with the fact that there are high overhead costs related to the desktop delivery option, also tells the reader that an incorrect accounting system is currently being used. One needs only to look at the profitability difference between Customer A & B. Currently, there is no difference in the way that the size of orders are priced. In their current system, only the larger orders create a profit for the customer.

ii. 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.

The four activity cost-driver rates can be calculated as follows (show in question ii workings):

* Process Cartons in and out of the facility = ((%of warehouse personnel X total warehouse personnel expense) + cost of items purchased) / number of cartons processed.

* Desktop Delivery Service = ((% of warehouse personnel X total warehouse personnel expense) + Delivery truck expenses) / number of desktop delivery cartons

* Order Handling = (Warehouse expenses + Freight costs) / (Manual Orders + EDI Orders)

* Data Entry = Order Entry Expenses / Order Lines

iii. Using your answer to Question ii., calculate the profitability for Customer A and Customer B.

As shown in the workings for question iii, Customer A nets a positive profitability while Customer B does not. By multiplying each of the four cost driver rates by their respective activity rates (found in Exhibit 3 of the Dakota case study), we can effectively find that the total costs of item

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