5-37 Activity-based costing, merchandising. Pharmacare Inc. specializes in the distribution ceutical products. Pharmacare operates at capacity and has three main market segments a. General supermarket chains b. Drugstore chains C. "Mom and Pop single-store pharmacies Rick Flair, the new controller of Pharmacare, reported the following data for August 2015: Revenues Cost of goods sold Gross margin Other operating costs Operating income General Supermarket Chains $3,708,000 3,600,000 $ 108,000 Drugstore Chains $3,150,000 3,000,000 $ 150,000 "Mom and Pop" Single Stores $1,980,000 1,800,000 $ 180,000 Pharmacare $8,838,000 8,400,000 438,000 301,080 $ 136,920 For many years, Pharmacare has used gross margin percentage Revenue - Cost of goods sold) Revenue) to evaluate the relative profitability of its different groupings of customers (distribution outlets). Flair recently attended a seminar on activity-based costing (ABC) and decides to consider using it at Pharmacare. Flair meets with all the key managers and many staff members. People generally agree that there are five key activity areas at Pharmacare: Activity Area Cost Driver Order processing Number of customer purchase orders Line-itam processing Number of line items ordered by customers Delivering to stores Number of store deliveries Cartons shipped to store Number of cartons shipped Stocking of customer store shelves Hours of shalf-stocking Each customer order consists of one or more line items. A line item represents a single product such as Extra-Strength Tylenol Tablets). Each product line item is delivered in one or more separate cartons. Each store delivery entails the delivery of one or more cartons of products to a customer. Pharmacare's staff stacks cartons directly onto display shelves in customers' stores. Currently, there is no additional charge to the customer for shelf-stocking, and not all customers use Pharmacare for this activity. The level of mach activity in the three market segments and the total cost incurred for each activity in 2015 are shown below: General "Mom and Total Cost Supermarket Drugstore Pop Single of Activity Activity Chains Chains Stores in 2015 Number of orders processed 1,500 $80,000 Number of line items ordered 1,060 4,320 15,000 63,840 Number of store deliveries made 350 1,000 71,000 Number of cartons shipped to stores 36,000 24,000 16,000 76.000 Shelf stocking hours) 360 180 100 10.240 360 120 Required 1. Compute the August 2015 gross margin percentage for each of Pharmacare's three market segments 2. Compute the August 2015 per-unit cost driver rate for each of the five activity areas. 3. Use the activity-based costing (ABC) information to allocate the $301.080 of other operating costs" to each of the market segments. Compute the operating income for each market segment. 4. Comment on the results. What now insights are available with the activity-based information
