John Malone, general manager of Midwest Office Products (MOP) was concerned about the financial results for calendar year 2003. Despite a sales increase from the prior year, the company had just suffered the first loss in its history

John Malone, general manager of Midwest Office Products (MOP) was concerned about the financial results for calendar year 2003. Despite a sales increase from the prior year, the company had just suffered the first loss in its history (see summary income statement in Exhibit 1). Midwest Office Products was a regional distributor of office supplies to institutions and commercial businesses. It offered a comprehensive product line ranging from simple writing implements (such as pens, pencils, and markers) and fasteners to specialty paper for modern high-speed copiers and printers.

MOP had an excellent reputation for customer service and responsiveness. Warehouse personnel at MOP’s distribution center unloaded truckload shipments of products from manufacturers, and moved the cartons into designated storage locations until customers requested the items. Each day, after customer orders had been received, MOP personnel drove forklift trucks around the warehouse to accumulate the cartons of items and prepare them for shipment.

MOP ordered supplies from many different manufacturers. It priced products to its end-use customers by first marking up the purchased product cost by 16% to cover the cost of warehousing, order processing, and freight. Then it added another 6% markup to cover the general, selling, and administrative expenses, plus an allowance for profit. The markups were determined at the start of each year, based on actual expenses in prior years and general industry and competitive trends. Midwest adjusted the actual price quoted to a customer based on long-term relationships and competitive situations, but pricing was generally independent of the specific level of service required by that customer, except for desktop deliveries.

Melissa and Tim collected information from company data bases and learned the following:

•The distribution centers processed 80,000 cartons in 2003. Of these, 75,000 cartons were shipped by commercial freight. The remaining 5,000 cartons were shipped under the desktop delivery option. Midwest made 2,000 desktop deliveries during the year (the average desktop delivery was for 2.5 cartons).

•People felt that handling, processing and shipping 80,000 cartons per year was about the capacity that could be handled with existing resources of people and space. •The total compensation for truck drivers was $250,000 per year. Each driver worked about 1,500 hours per year doing the desktop delivery service. This was also the maximum time available from each truck, after subtracting maintenance and repair time.

•Midwest employed 16 order-entry operators. The $840,000 of order-entry costs in Midwest’s income statement included the salaries, fringe benefits, supervision, occupancy and equipment costs for the operators.

•With vacations and holidays, each operator worked about 1,750 hours per year. But allowing for breaks, training, and other time off, the order-entry supervisor believed that operators provided about 1,500 hours per year of productive work.

•Operators required about 9 minutes (0.15 hours) to enter the basic information on a manual customer order. Beyond this basic setup time for a manual order, operators took an additional 4.5 minutes (0.075 hours) to enter each line item on the order. The operators spent an average of 6 minutes (0.10 hours) to verify the information on an electronic order.

•Some customers paid their invoices within 30 days, while others took 90 to 120 days to pay. Midwest had recently taken out a working capital loan to help finance its growing accounts receivables balance. The current interest rate on this loan was 1% per month on the average loan balance.

Answer the following questions based off the attached case study:
A. based on the interviews and the data in the case, estimate the following:
1. The cost of processing cartons throughout the facility
2. The cost of entering electronics and manual customer orders
3.The cost of shipping cartons on commercial carriers
4. The cost per hour of desktop deliveries
B. Using this capacity cost rate information, calculate the cost and profitability of the five orders in exhibit 6-10. What explains the variation in profitability across the fiver orders.

C. On the basis of your analysis, which actions should John Malone take to improve Midwest’s profitability? Include suggestions for managing customers profitability.
D. Suppose that currently, Midwest processes 40,000 manual orders per year , with a total of 200,000 line items entered and 30,000 electronic orders.
1. How much unused practical capacity does the company have?
2. If the company’s efforts to encourage customers who order manually to change to electronic ordering results in 20,000 manual orders per year (100,000 line items entered) and 50,000 electronic orders, how many orders enter operations to the number of employees, what will be the cost savings from the changes?
3. Returning to the original information in part d, if the company’s process improvement efforts result in 20% reduction in time to perform each of the three order entry activities, how many orders eatery operations will the company require? if order enter resources costs can be reduced in proportion to the number of employees, what will be the closest savings from the process improvements?