3. HQ Drugs Inc. is a distributor of pharmaceutical products. Its ABC system has five activities: (Click the icon to view the activities.) Rick Flair, the controller of HQ Drugs, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the mom-and-pop single-store distribution market. Two customers are used to exemplify the insights available with the ABC approach. Data pertaining to these two customers in August 2018 are as follows: 2(Click the icon to view the customers' data.) Required Requirement 1. Use the ABC information to compute the operating income of each customer in August 2018. Comment on the results and what, if anything, Flair should do. (Round your answers to the nearest whole dollar. Use parentheses or a minus sign for operating losses.) Cachet Lundar Pharmacy Pharmacy Revenues Cost of goods sold Gross margin Operating costs Operating income (loss) (1) has a lower gross margin percentage and consumes (2) resources to obtain this lower margin. Requirement 2. Flair ranks the individual customers in the mom-and-pop single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $64,050. HQ Drugs reports operating losses of $25,820 for the bottom 40% of its customers. Make four recommendations that you think HQ Drugs should consider in light of this new customer profitability information. Ways HQ Drugs could use this information include the following: 1. Pay (3) attention to the top 20% of the customers. 2. Work out ways internally at HQ Drugs to (4) the rate per cost driver. 3. Work with customers so that their behaviour (5) the total "system-wide" costs. 4. Offer salespeople bonuses based on the (6) of each customer rather than the gross margin of each customer. 1: Activities Activity Area Cost Driver Rate in 2018 1. Order processing 2. Line-item ordering 3. Store deliveries $41 per order $4 per line item $54 per store delivery $5 per carton $18 per stocking-hour 4. Carton deliveries 55. Shelf-stocking 2: Customers' data Cachet Lundar Pharmacy Pharmacy Total orders 17 9 12 15 Average line items per order Total store deliveries 4 7 19 22 0.25 0.5 Average cartons shipped per store delivery Average hours of shelf-stocking per store delivery Average revenue per delivery Average cost of goods sold per delivery $ 2,400 $ 1,950 $ 2,000 $ 1,500 3: Required 1. Use the ABC information to compute the operating income of each customer in August 2018. Comment on the results and what, if anything, Flair should do. 2. Flair ranks the individual customers in the mom-and-pop single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $64,050. HQ Drugs reports operating losses of $25,820 for the bottom 40% of its customers. Make four recommendations that you think HQ Drugs should consider in light of this new customer profitability information. (3) (1) O Lundar Pharmacy O Cachet Pharmacy (2) O less O more oo decreased o increased (4) O increase O reduce (5) O increases O reduces (6) O cost of goods sold O operating income O revenues
