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-case study-
Managerial Accounting
Summer Semester 2017
a) Based on the interviews and data in the case, estimate:
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
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
Cartons/Year 80000
Cartons/Year/Commercial Freight 75000
Cartons/Year/Desktop deliveries 5000
Freight Costs/Year 4500000
Freight Costs/Carton 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
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:
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 /
15 500
= 10.33 11
1500
840 000
= $52 500
16
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 /
19 200
= 12.8 13
1500
840 000
= $52 500
16