Ordinary Office Products, Inc., a retail office supply company, has a single outlet in a large metropolitan area. The company has a policy of delivering any size order, even a bottle of Liquid Paper, to any customer, regardless of the distance. Management believes that without this delivery policy the company will not be able to maintain its market share. Since delivery costs are considered a selling expense and not a product cost, the company has a positive gross margin. That is, the company appears to be making money on its sales. The problem is that the company has shown an operating loss for each of the past three years and is on the verge of having its bank financing withdrawn. Management has been attempting to solve its profitability problems by increasing sales of its delivered merchandise.

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The Answer of Ordinary Office Products, Inc., a retail office supply company, has a single outlet in a large metropolitan area. The company has a policy of delivering any size order, even a bottle of Liquid Paper, to any customer, regardless of the distance. Management believes that without this delivery policy the company will not be able to maintain its market share. Since delivery costs are considered a selling expense and not a product cost, the company has a positive gross margin. That is, the company appears to be making money on its sales. The problem is that the company has shown an operating loss for each of the past three years and is on the verge of having its bank financing withdrawn. Management has been attempting to solve its profitability problems by increasing sales of its delivered merchandise.