Case Study Dakota Office Supply Shadi Wadi-Ramahi Instructor: Roger Waibel MBA 510 Financial and Managerial Accounting Master of Business Administration School of Adult and Extended Learning Oakland City University September 30th,2010 * Contents 1Background Information3 1. 1People / Key Players3 1. 2Chronology of Key Relevant Events3 1. 3Key Facts4 1. 4Concepts4 1. 5Assumptions4 1. 6Point of View5 2Problem Statement5 3Problem Causal Analysis5 4Management Theory, Process, Approach5 5Recommendations6 6Assessment6 7Implications6 8Answer to questions7 9References9 Background Information Dakota Office Products (DOP) is a regional distributor of office supplies with several distribution centers. The company has just suffered its first loss in its history even though sales have increased. Part of the sales increases can be attributed to the new “desk top” option, which DOP delivers products to customers directly with premium markup, introducing electronic data exchange and utilizing the internet for ordering. 2. 1 People / Key Players John MaloneGeneral Manager of DOP Melissa DunhillController Tim CunninghamDirector of Operations
Wilbur SmithSite Manager at a one of the Distribution Centers Hazel NutleyData Entry Operator 2. 2 Chronology of Key Relevant Events DOP introduced electronic data interchange in 1999 and in 2000 DOP started accepting orders online via its new website. The same year DOP introduced its website DOP started offering the convenience of delivering the packages of supplies directly to individual locations at the customer’s site, this was called “desk top”. The financial results of calendar year showed that DOP sales increases yet it has suffered its first loss in history. 2. 3 Key Facts
The Activity Analysis made by Melissa shows the time required by Data Entry operators for each operation. The Analysis shows also the number of cartons processed for that year and amount of desktop deliveries handled by the distribution center. The Exhibits in this case study shows Dakota Office Products income statement and its expenses from running its operation, also Exhibit 2 & 3 compare two similar companies with one using EDI (Electronic Data Interchange) while the other is still using DOP human resources and placing smaller frequent orders and utilizing desktop deliveries for that.
This comparison shows where DOP expenses are going and where they need to improve their operations. 2. 4 Concepts The major idea here is to understand how DOP can turn around its loss and reduce some of the overhead with increased sales. . 2. 5 Assumptions The biggest assumption is current management has a conflict between product approvals and with their ownership of competing companies stocks. 2. 6 Point of View To move Dakota Office Products to profitability while maintaining the increases in revenue. Problem Statement To encourage DOP customers to utilize its internet for ordering, thus generating better gross margins from this low cost system. 3 Problem Causal Analysis The problem DOP is facing is the extra overhead from the new service they have introduced, this service being “desk top” delivery for their customers. This extra service that was introduced did contribute to the revenue stream of the company, but failed to contribute to the bottom line of the company.
The lack of understanding of actual cost of the new services which meant wrong markup and high accounts receivable from certain customers, contributed to loss in this year. 4 Management Theory, Process, Approach Activity Based Costing (ABC) is needed to be used as a new process in order to understand the affect of various operations in DOP. ABC will allow DOP to estimate the cost of its individual products and services and eliminate those which are unprofitable. Our Approach will be to study two similar customers (from sales prospective) and analyze their cost for each activity based on ABC. Recommendations DOP needs to modify their terms with some of their customers. Looking at customer “B” for example, calculations below shows that Net Income before taxes are merely $480, with customer “B” carrying a balance of $30K that means DOP is lending the customer cash at 10% interest rate! DOP needs to either increase the markup of 2% to 18% or limit the number of small order deliveries using desktop. Utilize internet ordering more efficiently and encourage customers to use it, this can be with temporary incentive such as free shipping for orders exceeding 20 cartons!
Using this method would encourage customer to order larger orders and use the internet to save on manual entry and reduce small order amounts. 6 Assessment Increasing the markup charge on desktop delivery might be the hardest part, but pushing customers to utilize EDI would easy to implement if temporary incentives were enacted. 7 Implications Continuing the course DOP at now, losses will accumulate year after year if desktop delivery was pushed to take over commercial deliveries and not utilizing the efficiency of the internet base ordering, will result in negative cash flows and eventually business not able to sustain. Answer to questions 1. The company failed to take into account the various costs associated with each product. The assumption was made that the new desktop delivery would have same cost structure as older method
2. Please see calculations below Activity Cost Pool| Estimated Overhead Cost| Expected Activity| Activity Rate| Number of Cartons Processes| $ 4,160,000 | 80,000 | $ 52. 0 | # of cartons shipped commercial| $ 450,000 | 75,000 | $ 6. 0 | # of desktop delivery| $ 440,000 | 2,000 | $ 220. | # of orders, manual| $ 160,000 | 16,000 | $ 10. 0 | # of Individual order lines in an order| $ 600,000 | 150,000 | $ 4. 0 | # of EDI orders| $ 40,000 | 8,000 | $ 5. 0 | 3. Please see calculations below Dakota Office Products | Income Statement year 2000 for Customer A & B| | | | | Customer A| Customer B| | | | | Dollar| Percent| Dollar| Percent| Sale| $ 103,000 | 121. 2%| $ 104,000 | 122. 4%| Cost of Items Purchased| $ 85,000 | 100%| $ 85,000 | 100. %| Gross margin| $ 18,000 | 21. 2%| $ 19,000 | 22. 4%| Warehousing, Distribution & Order Ent. | $ 11,930 | 14. 0%| $ 18,520 | 21. 8%| Total Expense| $ 11,930 | | $ 18,520 | | Net Income Before Taxes| $ 6,070 | 7. 1%| $ 480 | 0. 6%| 4. Customer B has higher overhead cost that actually thought, while customer A ended up with a lower overhead cost. This in return affected the net income. 5. No limitations since all values are given. 6.
Customer A pays their invoices faster than customer B, this is reflected on Average accounts receivable. DOP has to finance the $30K that customer B carries and in return pays 10% interest on that amount which in return even lower the Net Income for B. 7. Applying ABC to reset of customer base, would give them a clear idea on how to markup their products or to tweak certain rules. For example if a customer carries a higher balance (accounts receivable) a penalty or additional cost can be added to offset the interest and encourage customers to pay invoices faster.
Also ability to simulate how each new product can affect the bottom line. 8. The activity rate would be cut in half if all orders went to Internet site. Taking customer B as an example the 100 manual orders if they all went to EDI, this will eliminate # of line and manual orders and increase EDI from 0 to 100. The overhead per carton will decrease from $92. 5 to $85 = 7% savings | | | | Customer A| Customer B| | | | | Expected Activity| Amount| Expected Activity| Amount| Number of Cartons ordered| 200 | $ 10,400 | 00 | $ 10,400 | # of cartons shipped commercial| 200 | $ 1,200 | 150 | $ 900 | # of desktop delivery| – | $ – | 25 | $ 5,500 | # of orders, manual| 6 | $ 60 | 100 | $ 1,000 | # of line items, manual| 60 | $ 240 | 180 | $ 720 | # of EDI orders| 6 | $ 30 | – | $ – | TOTAL OVERHEAD COST| | $ 11,930 | | $ 18,520 | Number of Cartons ordered| 200 | | 200 | | Over head per carton| | $ 59. 65 | | $ 92. 60 |
9 References “Introduction to Activity Based Costing”, http://www. accountingcoach. com/online-accounting-course/35Xpg01. html “Re-thinking Activity Based Costing”, http://hbswk. hbs. edu/item/4587. html “Activity Based Costing – An introduction to concepts of ABC”, http://www. asaresearch. com/articles/abc. htm