Hbr Dakota Case

Case: Dakota Office Products

Dakota Office Products (DOP) is a company that distributes an extensive line of office supplies to businesses through several distribution centers. To enhance customer experience and offer an increased level of service, DOP recently introduced an electronic data interchange (EDI), which allows customers to place orders automatically, as well as a new convenient “desk top” delivery service. Despite these additions, DOP continued to see a decline in profitability, forcing an evaluation of its costing model.

The introduction of these new offerings creates some complexity for DOP. With the added ordering and delivery options, customers are able to “mix and match” those that best suit their needs, creating a larger number of possible combinations for DOP to fulfill. Unfortunately, offering a variety of services means that DOP’s straight-line costing method is no longer consistent with their operating environment, as the costs to service each of these options differ accordingly.

Additional factors DOP has not considered with its current costing model are the variances that come from the size of the orders, order frequency, and the cash flow issues that can arise from differing accounts receivables periods. When using a costing method that distributes costs evenly among customers, despite the fact that the costs to fulfill and ship orders differ based on each customer’s behavior, DOP is forfeiting a number of opportunities to optimize its profitability. Therefore, an activity-based cost system would be more ideal for DOP’s operating environment.

Using data from DOP in 2000, we have developed an activity based cost (ABC) system with the following activity cost-driver rates:

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In these calculations, the following assumptions were made:

● The four primary activities outlined in the case are the four activities on which we chose to base costs in the ABC method. We are assuming that the SG&A, interest expense, and COGP...