Ethical Drugs (A)

Ethical Drugs, Inc., is a decentralized pharmaceutical company. The Sales and Marketing

(S&M) division oversees all distribution activities of its pharmaceutical products. The division

buys products from the various production divisions at pre-determined transfer prices which are

set by headquarters annually. The company identifies three main distribution channels:

A. General supermarket chains

B. Drugstore chains

C. "Ma and Pa" single-store pharmacies

For many years, the S&M division has used gross margin percentage ([Revenue minus Cost of

Goods Sold] divided by Revenue), to evaluate the relative profitability of its distribution

channels. The calculated gross margins for the three distribution channels for April were:

General Supermarket Drugstore Ma and Pa Chains Chains Stores Total 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 Operating Costs 351.080 Operating Income 86,920 Gross Margin % 2.91% 4.76% 9.09% 4.96%Average revenue per delivery Average cost of goods sold per delivery Number of Deliveries General Supermarket Chains $30,900 $30,000 1 20 Drugstore Chains $10,500 $10,000 300 Ma and Pa Stores $1,980 $1,800 1,000 Total Costs Total Units of Cost Activity Area in April Driver in April 1. Order Processing $ 80,000 2,000 orders 2. Line item ordering 63,840 21,280 line items 3. Store deliveries 71,000 1,420 store deliveries 4. Carton deliveries 76,000 76,000 cartons 5. Shelf stacking 10,240 640 hours 6. Corporate SGA 50,000 unallocated $351.080Total number of orders Average number of line items per order Total number of store deliveries Average number of cartons shipped per store delivery Average number of hours of shelf stacking per delivery General Supermarket Chains 140 14 120 300 300 80 0.6 Ma and Pa Stores 1,500 10 1,000 16 0.1