Activity-based costing, merchandising.

Pharmacare Inc. specializes in the distribution of pharmaceutical products. Pharmacare operates at capacity and has three main market segments:

1. General supermarkets chains
2. Drugstore chains
3. "Mom and Pop" single-store pharmacies

Rick Flair, the new controller of Pharmacare, reported the following data for August 2022:

General Drugstore "Mom & Pop"

Supermarket Chains Single Store

Chains Total

Revenues$3,725,000 $3,175,000 $1,960,000 $8,860,000

COGS $3,600,000 $3,027,000$1,805,000$8,432,000

Gross margin$125,000 $148,000 $155,000 $428,000

Other operating cost$319,000

Operating income$109,000

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 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 keys activity areas at Pharmacare.

Activity Area Cost Driver

Oder processingNumber of customer purchase orders

Line-item processingNumber of line items ordered by customers

Delivering to store Number of store deliveries

Cartons shipped to store Number of cartons shipped

Stocking of customer store shelvesHours of shelf-stocking

Each customer order consists of 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 customer's 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 each activity in the three market segments and the total cost incurred for each activity in 2022 are shown below:

General Drugstore "Mom & Pop" Total cost

Supermarket Chains Single Store of Activity

Activity Chains in 2022

Number of orders 150 360 1,490 $85,000

process

Number of line 1,980 4,500 14,520 $69,300

items ordered

Number of 122 278 1,050 $72,500

store deliveries

Number of 37,000 24,200 17,000 $78,200

cartons

Shelf-stocking 390 200 110 $14,000

(hours)

Required:

1. Compute the August 2022 gross margin percentage for each of Pharmacare's three market segments.
2. Compute the August 2022 per-unit cost driver rate for each of the five activity areas.
3. Use the ABC information to allocate the $319,000 of the "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 information?