Cinto Ltd, a distributor of special pharmaceutical products, operates at capacity and has three main market segments: a general supermarket chains b pharmacy chains pharmacist-owned single-store pharmacies. John Best, the new management accountant of Cinto, reported the following data for 2014: For many years, Cinto has used gross margin percentage ((Revenue Cost of goods sold) + Revenue) to evaluate the relative profitability of its market segments. But John recently attended a seminar on activity-based costing and is considering using it at Cinto to analyse 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 five key activities that drive other operating costs at Cinto: Activity area Order processing Line-item processing Delivering to stores Cartons shipped to store Stocking of customer store shelves Cost driver Number of customer purchase orders Number of line items ordered by customers Number of store deliveries Number of cartons shipped Hours of shelf-stocking Each customer order consists of one or more line items. A line item represents a single product (e.g. Nurofen Plus 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. Cinto'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 Cinto for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2014 is shown below: Home Insert Page Layout Formulas Data Review View Add-Ins A B C D E File 1 Home Insert A Page Layout Formulas Data B Review View C Add-Ins D E 2 Cinto Ltd, 2014 3 4 General supermarket chains Pharmacist- 13 Pharmacy chains 7 Gross margin 5 Revenues 6 Cost of goods sold 8 Other operating costs $3 708 000 $3 150 000 3 600 000 3 000 000 owned single stores $1 980 000 1 800 000 14 Activity-based cost data Activity level Cinto Ltd $8 838 000 8 400 000 15 Cinto 2014 16 17 Activity General supermarket chains Pharmacy chains Pharmacist- owned single stores Total cost of activity in 2014 $108 000 $150 000 $180 000 438 000 18 Orders processed (number) 140 360 1 500 $80 000 19 Line-items ordered (number) 1960 4 320 15 000 63 840 301 080 9 Operating profit $136 920 20 Store deliveries made (number) 120 360 1.000 71 000 21 Cartons shipped to stores (number) 36 000 24 000 16 000 76 000 22 Shelf-stocking (hours) 360 180 100 10 240 23 $301 080 Required 1 Calculate the 2014 gross-margin percentage for each of Cinto's three market segments. 2 Calculate the cost driver rates for each of the five activity areas. 3 Use the activity-based costing information to allocate the $301080 of 'other operating costs' to each of the market segments. Calculate the operating profit for each market segment. 4 Comment on the results. What new insights are available with the activity-based costing information?