This document analyzes the costs associated with different order fulfillment processes at Midwest Office Products. It estimates costs for processing cartons, entering orders manually/electronically, shipping by carrier, and desktop delivery. Using this cost data, it calculates the actual costs and profitability of five customer orders. It finds that the existing cost system did not properly account for differences in delivery methods and late payments, obscuring which customers were truly profitable. It recommends charging for late payments, reevaluating desktop delivery costs, and encouraging more use of the electronic ordering system to improve overall profitability.

1. Authors:
Philip Larson
Midwest Office Products

2. Midwest Office Products – Philip Larson
1) Based on the interviews and data in the case, estimate:
a. The cost of processing cartons through the facility
The only two costs of processing cartons through the facility are i) warehouse costs, and ii) warehouse
personnel costs. Both of these are proportional to the number of cartons. The total processing costs are
therefore $54/carton.
b. The cost of entering electronic and manual customer orders
Here, the cost is entirely based on personnel costs. Manual costs consist of both i) entering basic
information, and ii) an additional cost for each line item. The electronic entry has a single cost.
c. The cost of shipping cartons on commercial carriers

3. Midwest Office Products – Philip Larson
Freight cost per carton is simply the total freight cost divided by the number of cartons shipped by
commercial freight.
d. The cost per hour for desktop deliveries
The cost per hour for desktop deliveries includes the cost of both the drivers and the trucks themselves
(leasing, maintenance, etc.). There are four drivres working 1500 hours so the cost/hour is the total cost
divided by 6000.
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?
I’m not entirely sure what Midwest’s “existing costing system” is. However, assuming that the major difference is that
their existing system does not distinguish between customers who pay late or customers who use different delivery
(freight vs. delivery truck), they simply lump all these costs together and it becomes difficult to see which customers
are the most profitable. Below, I have calculated the profitability that breaks out the cost of both late payments and
different delivery mechanisms.

4. Midwest Office Products – Philip Larson
3) Explain the difference in profitability of the five orders calculated by the ABC system and the company’s
existing cost system.
Using the “standard way”, Midwest Office Products was not adequately determining the profitability of each order
based on the true costs of both the delivery mechanism (freight vs. truck delivery) and the late payments (interest of
1% per month). As a result, certain orders (like #2 above) appear profitable until you realize that they pay late and it
cost a very large amount to deliver the order ($300). This ate up all the margin in the deal leaving nothing left for
profit.
4) Based on your analysis above, what actions should John Malone take to improve Midwest’s profitability?
Midwest Office Products may want to rethink their Desktop Delivery option, at least for small orders. It drastically cuts
into the profitability of small deals. Additionally, they may want to require payment within 30 days or somehow charge
for the late payments. Additionally, Malone should try to get more people to use the new electronic system which
reduces the costs of operator entry. While these are not major costs, they can add up for orders with lots of line items.