1. Why was Dakota's pricing system inadequate for its current operating environment?
Currently, DOP's pricing system is pricing products by adding markup twice, which is marking up the purchased product cost by around 15% to cover the cost of warehousing, distribution, and freight. Then add another markup to cover the approximate cost, for general and selling expenses, plus an allowance for profit.
We found that the existing pricing system is inadequate regarding to following points:
Costs continue to rise for customers at normal circumstances which may due to various external reasons like inflations, economic situations etc. The current costing system could not cope with the highly competitive market, and the inflation will make the costs keep increasing to a level that the selling price might not able to cover it. It is because the selling price in based on actual expenses in previous years, while the expenses would still go up with the general inflation.
They only charge a small price premium (up to additional 2% markup) to the new desk top delivery. The new service did attract new customers but the inadequate mark-up of 2% for desktop delivery could not cover the costs of providing the service. If clients utilizing desktop delivery place smaller orders it has a negative effect on profit because costs are not covered.
Actual prices were adjusted based on long-term relationships and competitive situations, but were independent of the specific level of service provided to that customer (except for desk top deliveries), which means it takes no consideration to the difference between order with small size or larger size. Therefore, it is possible that costs will be understated or overstated in some cases.
Also, from the policy of customers pricing,...