1) Why was Dakota’s existing pricing system inadequate for its current operating environment?
The existing pricing system which was being used by DOP was meant for a company having homogenous products, large direct (fixed) costs, few data collection techniques and low overhead costs. By contrast, DOP exhibits a highly diversified product/service mix as evidenced by its’ employment of both commercial delivery methods and its new customized individually oriented ‘desktop delivery’ model which is accompanied by high overhead costs as compared to the fixed labor costs, a large amount of data with countless ways to analyze it, and considerable non-product, indirect, or hidden costs affecting overall pricing, costs and net expenditure. The current pricing system is also inadequate because it is incapable of accounting for even all of the known costs in addition to certain hidden costs. Certain factors are not being taken into account currently and there is room for differential pricing of products being implemented based on the services being offered and certain other factors like average accounts receivable balance, size of an order and the manner in which it is taken etc. An Activity Based Costing system would be the most accurate costing mechanism that can be implemented.
We shall analyze some of the individual factors leading to inadequacy in the current pricing mechanism:
? Currently no difference is being taken into account between the manual orders and the EDI/internet-orders, although processing the EDI/internet-orders requires considerably less time than the manual orders hence cost less money.
? Currently no difference is being taken into account between one big order and several small orders. Several ...