MIDWEST OFFICE PRODUCTS

-case study-

Managerial Accounting
Summer Semester 2017
 a) Based on the interviews and data in the case, estimate:

i. The cost of processing cartons through the facility

There are two costs of processing cartons through the facility: warehouse costs and
warehouse personnel costs. Those two costs are proportional to the number of cartons. Thus,
the total processing cost are 54$/carton.

Cartons/Year 80000
Cartons/Year/Commercial Freight 75000
Cartons/Year/Desktop deliveries 5000
Personnel Costs/Year 2570000
Truck driver costs/Year 250000
Warehouse personnel costs/Year 2320000
Warehouse costs (without the personnel) 2000000

Warehouse personnel costs per carton 29

Warehouse costs without personnel per carton 25
Total processing costs 54

ii. The cost of entering electronic and manual customer orders

The cost is, in this case, totally based on personnel costs. Manual costs consist in entering basic
information and an additional cost for each line item. The electronic entry has a single cost.

Orders operators 16
Order entry costs/Year 840
Operator hours/Year 1750
Productive operator hours/Year 1500
Total productive hours/Year 24000
Total operator house/Year 28000
Average time for electronic order 0,1
Average time for manual order
Time to enter basic information 0,15
Time to enter each line item 0,075

Cost per productive hour 35

Cost per hour 30
Cost per electronic order 3,5
Cost per manual basic info. 5,25
Cost per manual entry 2,625
 iii. The cost of shipping cartons on commercial carriers
To determine the freight cost per carton, we just need to divide the total freight cost by the number
of cartons shipped by commercial freight.

Cartons/Year 80000
Cartons/Year/Commercial Freight 75000
Cartons/Year/Desktop deliveries 5000
Freight Costs/Year 4500000
Freight Costs/Carton 60

iv. The cost per hour for desktop deliveries

In the cost per hour for desktop deliveries, we must include the costs of the drivers and the costs
of the trucks (maintenance, leasing). As we have four drivers working 1500 hours, the cost per
hour is equal to the total cost divided by 60.

Cartons/Year 80000
Cartons/Year/Commercial Freight 75000
Cartons/Year/Desktop deliveries 5000
Personnel Costs/Year 2570000
Truck driver costs/Year 250000
Warehouse personnel costs/Year 2320000
Drivers hours/Year 1500
Total desktop deliveries 2000
Average cartons per desktop deliveries 2.5
Delivery truck expenses 200000
Total cost of desktop delivery/Year 450000
Number of truck drivers 4
Number of driver hours/Year 6000
Cost/Hour for desktop delivery 75
 b) Using this capacity cost information, calculate the cost and profitability of the five
orders in exhibit 2. What explains the variation in profitability across the five
orders?

Order 0 2 3 4 5
Price 610 634 6100 6340 6100
Acquisition cost 500 500 5000 5000 5000
No. Cartons in order 1 1 10 10 10
No. Cartons shipped 1 0 10 0 10
Desktop delivery time 4 4
Manual order No Yes No Yes Yes
No. Line item in order 1 1 10 10 10
Electronic order Yes No Yes No No
Payment period (months) 1 4 1 4 4

Price 610 634 6100 6340 6100

Acquisition cost 500 500 5000 5000 5000
Gross margin 110 134 1100 1340 1100

Processing costs 54 54 540 540 540

Operator entry costs 3,5 7,875 3,5 31,5 31,5
Freight costs 6 0 60 0 60
Desktop delivery costs 0 300 0 300 0
Interest of 1% due to late payments 6,1 25,36 61 253,6 244

Total non acquisition costs 69,6 387,235 664,5 1125,1 875,5

Order profitability 40 253 436 215 225

The variation of the profitability between the five orders can be explained by the fact that using a
usual way, Midwest did not determine properly the profitability of each order based on the true
costs of delivery (freight vs. truck) and the late payments (interest of 1% per month). That is why
some orders seems to be very profitable, whereas they pay late, which costs a lot to deliver the
order (300$).

c) On the basis of your analysis, what actions should John Malone take to improve
Midwests profitability? Include suggestions for managing customer profitability.
I think that Midwest should change their desktop delivery option, especially for small orders. It
reduces a lot the profitability of small deals. Another solution would be to get more people to use
the new electronic system, which reduces the costs of operator entry.
 d) Suppose that currently, Midwest processes 40,000 manual orders per year, with a
total of 200,000 line items to enter, and processes 30,000 electronic orders:

i. How much unused practical capacity does the company have?

Considering the before calculated times for each operation, in this case, the company needs:

(40 000 0.15) + (200 000 0.075) + (30 000 0.1) = 24 000 /

In 2003, while working in full capacity, MOP needed 16 order entry operators, which means,
the full capacity of the company is:

16 1500 = 24 000 /

Comparing the results above, it is clear that the company does not have any unused capacity.

ii. If the companys efforts to encourage customers who order manually to change
to electronic ordering results in 20,000 manual orders per year, 100,000 line items
to enter, and 50,000 electronic orders, how many order entry operators will the
company require? If order entry resource costs can be reduced in proportion to
the number of employees, what will be the cost savings from the changes?

In this scenario, the number of hours per year the company would need is:

(20 000 0.15) + (100 000 0.075) + (50 000 0.1) = 15 500 /

Calculating the number of operators:

15 500
= 10.33 11
1500

The cost per operator is:

840 000
= $52 500
16

The cost savings would be:

$52 500 (16 11) = $262 500

iii. Returning to the original information in (d), if the companys process

improvement efforts result in a 20% reduction in time to perform each of the three
entry activities, how many order entry operators will the company require? If order
entry resource costs can be reduced in proportion to the number of employees,
what will be the costs savings from the process improvement?

In this scenario, the number of hours per year the company would need is:
 (40 000 0.12) + (200 000 0.06) + (30 000 0.08) = 19 200 /

Calculating the number of operators:

19 200
= 12.8 13
1500

The cost per operator is:

840 000
= $52 500
16

The cost savings would be:

$52 500 (16 13) = $157 500