Activity-based costing, merchandising. Figure Four Inc. operates a company that specializes in the distribution of pharmaceutical products. Figure Four buys from pharmaceutical companies and resells to each of three different markets:

A. General supermarket chains B. Drugstore chains C. "Ma and Pa" single-store pharmacies Rick Flair, the new controller of Figure Four, reported the following data for August 194:

General Ma and Pa Supermarket Drugstore Single Chains Chains Stores Average revenue per delivery $30,900 $10,500 $1,980 Average cost of goods sold per delivery $30,000 $1 0,000 $1 ,800 Number of deliveries 120 300 1,000 For many years, Figure Four has used gross margin percentage ([revenue - cost of goods sold]

* revenue) to evaluate the relative profitability of its different distribution outlets.

Flair recently attended a seminar on activity -based costing and decides to consider using it at Figure Four. Flair meets with all the key business area managers and many staff members.

People generally agree that there are five key activity areas at Figure Four:

Activity Area Cost Driver 1. Order processing Number of orders 2. Line item ordering Number of line items 3. Store deliver) Number of store deliveries 4. Cartons shipped to stores Number of cartons shipped to a store per delivery 5. Shelf stacking at customer store Number of hours of shelf stacking Each order consists of one or more line iu s. A line item represents a single product (such as Extra -Strength T\ :enol Tablets). Each store delivery entails delivery of 1 or more cartons of products. Each product is delivered in 1 or lore separate cartons. Figure Four delivery staff stack cartons directly onto display shelves in a sh Currently there is no charge for this service and not all customers use Figure Four for this tivity.
The August 19_4 operating costs (other than cost t goods sold) of Figure Four are 5301,080.
These operating costs are assigned to the five activih reas. The costs in each area and the number of cost drivers in that area for August 194 are:
Activity Area Total Units of Cost Total Costs in Driver August 19_4 in August 19_4 S 80.000 2.000 orders 63.840 21,280 line items 71 ,000 1,420 store deliveries 76,000 76.000 cartons 10,240 640 hours S301.080 1 . Order processing 2. Line item ordering 3. Store deliveries 4. Carton deliveries 5. Shelf stacking Other data for August 194 are:
General Ma and Pa Supermarket Drugstore Single Chains Chains Stores Total number of orders Average number of line items per order Total number of store deliveries Average number of cartons shipped per store delivery Average number of hours of shelf stacking per store delivery Required 1. Compute the August 19_4 gross-margin percentages for its three distribution markets. What is the operating income of Figure Four?
2. Compute the August 19_4 per unit cost driver rate for each of the five activity areas.
3. Compute the operating income of each distribution market in August 194 using the activitv-based costing information. Comment on the results. What new insights are available with the activity-based information?
4. Describe four challenging problems Flair would face in assigning the total August 194 operating costs of S301,080 to the five activity areas.