Midwest Office Products

Questions for Midwest Office Products 1. Based on the interviews and data in the case, estimate:

a. The cost of processing cartons through the facility 80000 total cartons

Warehouse expenses = \$2000000
Warehouse personnel expenses = \$2570000-\$250000 (truck driver expenses) = \$2320000
Total warehouse processing expenses:\$2000000 + \$2320000 = \$4,320,000 \$4320000/80000= \$54/carton

b. The cost of entering electronic and manual customer orders

Manual: . 15 hours setup time, . 075 hours to enter each line
Electronic: . 1 hours to verify information on the electronic order 16 order entry operators 840000 in total compensation
Each order entry operator worked 1750 hours per year but only 1500 hours per year of productivity 840000/16 = \$52500 avg salary per operator \$52500/1500hrs = \$35 per hour
Electronic orders: . 1hrs *\$35/hr = \$3. 5/electronic order
Manual Orders: . 15*\$35 +. 075*\$35*number of lines= cost per order Input cost=. 15*35 = 5. 25
Cost per line = . 075*35 = 2. 63

c. The cost of shipping cartons on commercial carriers 75000 cartons shipped \$450000 spent on freight \$450000/75000 cartons = \$6 per carton
d. The cost per hour for desktop deliveries vg delivery time=3 hours 5000 cartons shipped 2000 deliveries 2. 5 cartons each delivery \$250000 total compensation per year \$200000 for delivery truck expenses

Each driver worked 1500 hours per year \$166. 67/hr
Driver compensation: \$250000/2000 = \$125 per delivery
Truck expenses: \$200000/2000 = \$100 per delivery
Total cost for desktop deliveries: \$225/3 hrs = \$75/hr 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 Midwest’s existing costing system?
Exhibit 2

Five Orders

Order
1
2
3
4
5

Price
\$ 610
\$ 634
\$ 6,100
\$ 6,340
\$ 6,100

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 items in order
1
1
10
10
10

Electronic order
yes
no
yes
no
no

Payment period (months)
1
4
1
4
4

Warehousing costs
54
54
540
540
540

Shipping costs
6
0
60
0
60

Desktop Delivery cost

300

300

Manual Order cost

7. 875

31. 5
31. 5

Electronic order cost
3. 5

3. 5

Payment period cost
\$ 6. 10
\$ 25. 36
\$ 61. 00
\$ 253. 60
\$ 244. 00

Total Costs
569. 6
887. 235
5664. 5
6125. 1
5875. 5

Profits
\$ 40
\$ (253)
\$ 436
\$ 215
\$ 225

Current system profits
\$ 110
\$ 134
\$ 1,100
\$ 1,340
\$ 1,100

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