Question
5-37 ( Activity-based costing, merchandising.) Pharmahelp, Inc., a distributor of special pharmaceutical products, operates at capacity and has three main market segments: a. General supermarket
5-37 (Activity-based costing, merchandising.) Pharmahelp, Inc., a distributor of special pharmaceutical products, 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 Pharmahelp, reported the following data for 2017.
Pharmahelp, 2017 | General |
|
|
|
| Supermarket | Drugstore | Mom-and-Pop | Total for |
| Chains | Chains | Single Stores | Pharmahelp |
Revenues | $3,708,000 | $3,150,000 | $1,980,000 | $8,838,000 |
Cost of goods sold | $3,600,000 | $3,000,000 | $1,800,000 | $8,400,000 |
Gross margin | $108,000 | $150,000 | $180,000 | $438,000 |
Other operation costs |
|
|
| $301,080 |
Operation income |
|
|
| $136,920 |
For many years, Pharmahelp has used gross margin percentage [(Revenue-Cost of goods sold / Revenue] to evaluate the relative protability of its market segments. But Flair recently attended a seminar on activity-based costing and is considering using it at Pharmahelp to analyze and allocate other operating costs. He meets with all the key managers and several of his operations and sales staff, and they agree that there are ve key activities that drive other operating costs at Pharmahelp:
Activity Area Cost Driver
__________________________________________________________________
Order processing Number of customer purchase orders
Line-item 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 shelf-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. Pharmahelps 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 Pharmahelp for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2017 is as follows:
Pharmahelp, 2017 | General |
|
|
|
| Supermarket | Drugstore | Mom-and-Pop | Total for |
| Chains | Chains | Single Stores | Pharmahelp |
Order processed (number) | 140 | 360 | 1,500 | $80,000 |
Line-item (number) | 1,960 | 4,320 | 15,000 | $63,840 |
Store deliveries made (number) | 120 | 360 | 1,000 | $71,000 |
Cartons shipped to stores (number) | 36,000 | 24,000 | 16,000 | $76,000 |
Shelf stocking (hours) | 360 | 180 | 100 | $10,240 |
|
|
| $301,080 |
Shown calculations for the following:
1. Compute the 2017 gross-margin percentage for each of Pharmahelps three market segments.
2. Compute the cost driver rates for each of the five activity areas.
3. Use the activity-based costing 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 new insights are available with the activity-based costing information?
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