MANAGERIAL ACCOUNTING

Case study 1- Midwest office products assignment

CASE STUDY 1

MIDWEST OFFICE PRODUCTS ASSIGNMENT

JUAN GABRIEL GARCIA LUNA - 0150279133

REVIEWED BY:
Dr. JAMES MULLI
MANAGERIAL ACCOUNTING

MASTER OF SCIENCE IN CIVIL ENGINEERING - MEGASTRUCTURE

ENGINEERING WITH SUSTAINABLE RESOURCES

2016

MANAGERIAL ACCOUNTING
Case study 1- Midwest office products assignment

a) Based on the interviews and data in the case, estimate:

1) The Cost of processing cartons through the facility
Cost of process: $2,570,000+2,000,000= $4,570,000
Capacity

80,000 cartons

supplying capacity cots=

$57.125 per carton

2) The cost of entering electronic and manual customer orders

Order entry cost
Capacity of order entry:

$840,000
16 1,500 hours = 24,000

Cost of order entry process: $35/hour

Now cost per activity order
Entering a manual order:

0.150 35 = $5.25/manual order

Entering a line item on order

0.075 35 = 2.625/line item

Validating an EDI order

0.100 35 = 3.50/EDI order

3) The cost of shipping cartons on commercial carriers

Cost of resources for commercial shipments

$450,000

Quantity of cartons shipped

75,000

Shipping cost per carton

= $ 6/carton

4) The cost per hour for desktop deliveries

Cost of desktop delivery resources: $200,000 + 250,000 = $450,000

MANAGERIAL ACCOUNTING
Case study 1- Midwest office products assignment

6,000

Number of hours available for DD = 4 1,500

Cost rate for desktop delivery

= $75/hour

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?
Cost and profitability
1

$6.100,
00

$6.340,
00

$6.100,
00

$5.000,
00

$5.000,
00

$5.000,
00

$1.340,
00
$
571,25
$
$
300,00
$
5,25
$
26,25
$
$
253,00

$1.100,
00
$
571,25
$
60,00
$
$
5,25
$
26,25
$
$
244,00

Sales

$
610,00

$
634,00

Cost of items
purchased

$
500,00

$
500,00

Gross margin

$
110,00

$
134,00

Interest on
receivable

$
57,13
$
6,00
$
$
$
$
3,50
$
6,10

$
57,13
$
$
300,00
$
5,25
$
2,63
$
$
25,36

$1.100,
00
$
571,25
$
60,00
$
$
$
$
3,50
$
61,00

Total processing
costs

$
72,73

$
390,37

$
695,75

Processing cartons
Shipping cartons,
commercial
Desktop deliveries
Process manual
order
Process line items,
manual orders
Validate EDI order

Order profitability
Return on sales

$
$1.155, 906,75
75
$
-$
$
$
$
37,28
256,37 404,25 184,25 193,25
6,1% -40,4%
6,6%
2,9%
3,2%

MANAGERIAL ACCOUNTING
Case study 1- Midwest office products assignment

Variation in profitability analysis

In orders 1 and 2 we have similar values only the price for the second order was
4% higher for the direct delivery this makes the gross margin of the second order
be higher as well, but rather than have a higher profit Order 2 has a profit margin
of minus 40%, compared to the positive 6.1% net margin from Order 1.
For orders 3 and 4 are similar to 1 and 2 but this are multiplied by 10
the increase in revenues of $24 per carton makes $240 more revenues, making
the same value with the incremental costs of $240 ($300 $60) for direct versus
commercial delivery of the cartons and choosing a longer payment time in this
case 120 than 30 days the financing costs are close to $200 which is higher than
for Order 3 and for the order 5 is the same as Order 3, but for manual versus
electronic ordering and payment in 120 instead 30 days.

c) On the basis of your analysis, what actions should John Malone Take to improve
Midwests profitability? Include Suggestions for managing customer profitability.

Improve efficiency of warehouse operations, and order entry process

Migrate customers to more efficient channels

Process Improve

Pricing

Route optimization

Specific charges for DD

based on number of
drop points, distance
(time) traveled

Migrate customers to
more efficient channels
(EDI)

Discounts for EDI

orders

Improve efficiency of

Menu-based pricing
4

MANAGERIAL ACCOUNTING
Case study 1- Midwest office products assignment

warehouse operations,
and order entry process
Customer picks up at
warehouse; price
quoted FOB
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. Using the order entry times stated in part (a) (2), if Midwest processes
40,000 manual orders per year, with a total of 200,000 line items to
enter, and processes 30,000 electronic orders, then Midwest requires
(40,000 0.15) + (200,000 0.075) + (30,000 0.1) = 24,000 hours per
year, which equals the current practical capacity. Therefore, the company
needs all 16 operators and there is no unused capacity.

ii. Midwest will require (20,000 0.15) + (100,000 0.075) + (50,000 0.1)
= 15,500 hours per year, which requires 10.33 operators. The cost per
operator is $840,000/16 = $52,500. If order entry costs can be reduced
in proportion to the number of employees, the cost savings will be
$52,500 (16 10.33) = $297,500. If Midwest only hires full-time
employees, it will need 11 operators and the cost savings will be $52,500
(16 11) = $262,500.
iii. Midwest will require (40,000 0.12) + (200,000 0.06) + (30,000 0.08)
= 19,200 hours per year, which requires 12.8 operators. If order entry
costs can be reduced in proportion to the number of employees, the cost
savings will be $52,500 (16 12.8) = $168,000. If Midwest only hires
full-time employees, it will need 13 operators and the cost savings will be
$52,500 (16 13) = $157,500.

MANAGERIAL ACCOUNTING
Case study 1- Midwest office products assignment