Question
Get Well Drugs (GWD) is a distributor of pharmaceutical products. Its ABC system for customer service has five activities. The following table gives the activity
Get Well Drugs (GWD) is a distributor of pharmaceutical products. Its ABC system for customer service has five activities. The following table gives the activity cost rates for each activity
Activity | Activity cost rate |
Order processing | $42 per order |
Line-item ordering | $5 per line item |
Store deliveries | $47 per store delivery |
Carton deliveries | $4 per carton |
Shelf-stocking | $13 per stocking-hour |
Jack Smith, the controller of GWD, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the Ma and Pa single-store distribution market. Using only two customers helps highlight the insights available with the ABC approach. Data pertaining to these two customers for last fiscal year are as follows:
| A Pharmacy | B Pharmacy |
Total orders | 13 | 7 |
Average line items per order | 11 | 19 |
Total store deliveries | 5 | 7 |
Average cartons shipped per store delivery | 21 | 18 |
Average hours of shelf-stocking per store delivery | 0.5 | 0.75 |
Average revenue per delivery | $2,600 | $1,900 |
Average cost of goods sold per delivery | $2,100 | $1,700 |
1. Use the ABC information to compute the operating income of each customer for the last year. Comment on the results and what, if anything, Smith should do.
2. Smith ranks the individual customers in the Ma and Pa single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $58,120. GDW reports operating losses of $23,670 for the bottom 40% of its customers. Make four recommendations that you think Best Drugs should consider in light of this new customer-profitability information.
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