Dakota office Products Case

Section 1: Background.

Dakota Office Products (DOP) is a regional distributor of office supplies to institutions and businesses, which is managed by John Malone. The products they offered ranges from writing tools like pens to paper for copiers. DOP shipped products using trucks and delivering the desktop packages to customers directly. The existing pricing system is traditional which allocate both the direct and indirect cost to products and services. In order to provide convenience to its customers, Dakota had introduced electronic data interchange (EDI) in 1999 and a new Internet site in 2000. These innovations were considered to boost DOP’s profit margin, however, the financial results of showed a loss in the year of 2000.

Section 2: Problems and issues.

The problems of DOP faces are what cased the loss in the year of 2000 and how to regain the profitability.

The issues may give rise to this problem are related to their inappropriate existing pricing system and traditional cost calculation method. The reasons why it is not suitable for DOP can be concluded as follows: first, the traditional costing system, which allocated direct and indirect costs to products and services is good for the companies that are labor intensive. Second, the introduction of EDI and Internet site affected the cost of different customer because there are manual order and electronic order that made and check by the operators. In addition, the desktop delivery’s cost is different with the trucks, which appointed the warehouse personnel as the drivers.

In the case, DOP calculated at the same cost for customer A and B about the warehouse and order entry while they have different order size, different order method (EDI and manual), different delivery method (trucks and desktop delivery) and different time to pay (30 and 90 days).

It is obviously that customer A and B has different cost because customer A use the electronic order that reduce the labor cost of operator. Moreover, the desktop delivery of customer B cost a 2% premium than A. From the perspective of time to pay the order, customer A is much quicker than B. However, DOP did not measure the indirect overhead cost at different period and allocated them to per unit.

The existing pricing system is just markup over the purchase cost of products and does not consider the variety of customers like A and B in this case. Sometimes this pricing system may not cover the overall cost.

Section 3: Analysis to support my finding

We introduce another system to calculate the cost, which is Activity Based Costing that may fit for DOP’s current situation.

The advantages of ABC system are that it will focus the variety of customers and products, measure the indirect cost based on the different activities related, calculate the customer profitability and construct a price structure to help DOP to make better decision.