Midwest Office Products

Authors: Philip Larson

Midwest Office Products Philip Larson

1) Based on the interviews and data in the case, estimate: a. The cost of processing cartons through the facility The only two costs of processing cartons through the facility are i) warehouse costs, and ii) warehouse personnel costs. Both of these are proportional to the number of cartons. The total processing costs are therefore $54/carton.

b. The cost of entering electronic and manual customer orders Here, the cost is entirely based on personnel costs. Manual costs consist of both i) entering basic information, and ii) an additional cost for each line item. The electronic entry has a single cost.

c. The cost of shipping cartons on commercial carriers

Midwest Office Products Philip Larson

Freight cost per carton is simply the total freight cost divided by the number of cartons shipped by commercial freight.

d. The cost per hour for desktop deliveries The cost per hour for desktop deliveries includes the cost of both the drivers and the trucks themselves (leasing, maintenance, etc.). There are four drivres working 1500 hours so the cost/hour is the total cost divided by 6000.

2) Using this cost driver information, calculate the cost and profitability of the five orders in Exhibit 2. Compare these costs and profitability to those calculated by Midwests existing costing system? Im not entirely sure what Midwests existing costing system is. However, assuming that the major difference is that their existing system does not distinguish between customers who pay late or customers who use different delivery (freight vs. delivery truck), they simply lump all these costs together and it becomes difficult to see which customers are the most profitable. Below, I have calculated the profitability that breaks out the cost of both late payments and different delivery mechanisms.

Midwest Office Products Philip Larson

3) Explain the difference in profitability of the five orders calculated by the ABC system and the companys existing cost system. Using the standard way, Midwest Office Products was not adequately determining the profitability of each order based on the true costs of both the delivery mechanism (freight vs. truck delivery) and the late payments (interest of 1% per month). As a result, certain orders (like #2 above) appear profitable until you realize that they pay late and it cost a very large amount to deliver the order ($300). This ate up all the margin in the deal leaving nothing left for profit. 4) Based on your analysis above, what actions should John Malone take to improve Midwests profitability? Midwest Office Products may want to rethink their Desktop Delivery option, at least for small orders. It drastically cuts into the profitability of small deals. Additionally, they may want to require payment within 30 days or somehow charge for the late payments. Additionally, Malone should try to get more people to use the new electronic system which reduces the costs of operator entry. While these are not major costs, they can add up for orders with lots of line items.