Nancy's Pharmaceuticals is a distributor of special pharmaceutical products. Nancy's operated at capacity and has three main market segments:

• General Supermarket Chains
• Drugstore Chains
• Mom-and-Pop Single-store Pharmacies

Terry Botle, the new controller for Nancy's, reported the following data for 20X0:

	General Supermarket Chains	Drugstore Chains	Mom-and-Pop Single-store Pharmacies	Nancy's Pharmaceuticals
Revenues	$5,700,000	$4,444,000	$3,757,500	$13,901,000
Cost of Goods Sold	5,225,000	3,900,000	3,345,000	12,470,000
Gross Margin	$475,000	$544,000	$412,000	$1,431,000
Other Operating Costs				314,900
Operating Income				$1,116,100

For many years, Nancy's Pharmaceuticals has used gross margin percentage [(RevenueCost of Goods Sold) Revenue] to evaluate the relative profitability of its market segments. But, Terry Botle recently attended a seminar on activity-based costing and is considering using it at Nancy's to analyze and allocate other operating costs. Terry 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 Nancy's Pharmaceuticals

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 Shore 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. Nancy'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 Nancy's. for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 20X0 is as follows:

	General Supermarket Chains	Drugstore Chains	Mom-and-Pop Single-store Pharmacies	Total Cost of Activity in 20X0
Orders Processed	360	140	1,500	$85,900
Line-Items Ordered	4,320	1,960	15,000	70,500
Deliveries Made	360	120	1,000	65,000
Cartons Shipped	24,000	36,000	16,000	81,000
Shelf Stacking (hours)	180	360	100	12,500
				$314,900

Required:

1. Compute the 20X0 gross-margin percentage for each of Nancy's 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 $314,900 of other operating costs to each of the market segments. Compute the operating-income percentage for each market segment.
4. Compare the performance of the three segments based on your analysis in part 1 (i.e., based on gross-margin %) with your analysis in part 3 (i.e., based on operating income %).
5. For each segment, calculate the ratio of ABC operating costs to operating revenues.
6. Based on your analyses in parts 1 5 above, what strategic cost management recommendations can you provide to the management of Potter, Inc., Inc. to maximize their distribution channels operating income?