Essay on Dakota Case

940 Words Sep 16th, 2015 4 Pages
1 Dakota current allocates warehousing, distribution and order entry cost equally to each customer. DOP’s pricing system is generally independent of the specific level of service provided for customers. They just chose a single cost drive. However, it’s not believable and proper to use this simple method to analyze costs when costs are more complex. So we need to use activity-based cost system to chose different cost drives and allocate costs based on the activity.

2 We identify four different activities for all costs, order handling cost, ship carton cost or normal commercial shipment cost, desktop delivery cost, and order processing cost.

As we noticed, the distribution center team reported 90% of their workers proceed carton in
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Total cost for line items is $600,000 and it had total 150,000 lines. The overhead rate for line item is $4 per line item. Total cost for EDI checks is 400,000 and it had 8,000 checks. The overhead rate for EDI check is $ 50 per order.

3 According to the Exhibit 3, we find the number of each activity provided to customers A and B during year 2000. We use these number multiplies each overhead rate to get overhead costs for each activity. For customer A, we have gross margin $18,000 and other costs including, order handing cost $10,400, ship carton cost $1,200, manual order cost $60, line items $240, and EDI orders cost $300. Customer A also has interest expense based on his average accounts receivable within 30 days, which is $9,000 and annual interest rate is 10%. Therefore, the interest expense for customer A is $75. We use gross margin $18,000 subtracts total other cost including interest expense $12,275 to get profit for customer A, which is $5,725. We use the same method to get gross margin for customer B is $19,000 and total other cost including interest expense is $19,020. So customer B loses $20.

4 Customer A use normal shipment and most of orders are EDI orders. These two could save more spend and is more profitable for the company. However, customer B have 25 desktop deliveries. This cost is about 6.47% of cost of items purchased. Also, customer B uses traditional manual order and manual line items order that

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