Olivia Pharmaceutical manufactures and distributes Rodri, a patented drug that is very effective for blood clots. Currently the company only has four customers: two drug distributors East Jamie and West Kaleb, and two local pharmacies Mars and Park. Pharmaceutical industry is heavily regulated, and the government had decided on a maximum retail price (MRP) for Rodri. The MRP of Rodgi was set at $6,900 per box of 10,000 capsules, while the full production cost is $4,750 per box. Olivia Pharmaceutical allowed its sales force to give discounts to increase number of quantity sold. The Company is currently analyzing the profitability of its customers using the following activitybased costing information and most recent annual cost information.

Olivia Pharmaceutical manufactures and distributes Rodri, a patented drug that is very effective for blood clots. Currently the company only has four customers: two drug distributors East Jamie and West Kaleb, and two local pharmacies Mars and Park. Pharmaceutical industry is heavily regulated, and the government had decided on a maximum retail price (MRP) for Rodri. The MRP of Rodgi was set at $6,900 per box of 10,000 capsules, while the full production cost is $4,750 per box. Olivia Pharmaceutical allowed its sales force to give discounts to increase number of quantity sold. The Company is currently analyzing the profitability of its customers using the following activity- based costing information and most recent annual cost information. Total Cost of Cost per unit of Customer Related Activities Cost Driver Base Activity ($) Cost Driver ($) Order Processing Cost Number of sales order 997,500 4,750 Regular Delivery Cost Number of regular shipments 612,000 4,500 Overnight Delivery Cost Number of overnight shipments 888,000 12,000 Cost of Sales Visits Number of customer visits 495,000 6,600 Local Pharmacies Mars Park 45 30 Cost-driver and other data for the four customers for the most recent year are: Distributors Customer-Related Cost Driver Base West Activities East Jamie Kaleb Order Processing Cost Number of sales order 61 74 Regular Delivery Cost Number of regular shipments 31 56 Cost of Sales Visits Number of customer visits 23 20 Quantity Sold (in boxes) 2,257 3,650 Percentage Discount Given by Sales Force 8.50% 7.5% General Selling Costs (in $) 1,412,700 2,272,800 General Admin Costs (in $) 1,059,000 1,704,600 31 18 20 1,010 7.50% 12 975 2.90% 605,400 454,100 627,200 470,400 Required: 1. Prepare a customer profitability analysis for the four customers of Olivia Pharmaceuticals and calculate the rate of Customer Level Operating Income to Gross Revenue (13%). Do not forget to include the cost of overnight delivery in your calculation. 2. If you are the management of Olivia Pharmaceuticals, based on the result from Requirement 1, what is your response for each of the customer? (6%) 3. If Olivia Pharmaceuticals has targeted a 2.5% Customer Level Operating Income per customer from gross revenue; what is the maximum percentage of discount allowed per customer? (6%)