Q.35: Activity-based costing, merchandising. Pharmacare Inc. specializes in the distribution of pharmaceutical products. Pharmacare operates at capacity and has three main market segments:

1. General supermarket chains
2. Drugstore chains
3. Mom and Pop single-store pharmacies

Rick Flair, the new controller of Pharmacare, reported the following data for August 2022:

	General Supermarket Chains	Drugstore Chains	Mom and Pop single-store	Total
Revenues	$3,725,000	$3,175,000	$1,960,000	$8,860,000
Cost of goods sold	3,600,000	3,027,000	1,805,000	8,432,000
Gross margin	$125,000	$148,000	$155,000	428,000
Other operating costs				319,000
Operating income				$109,000

For many years, Pharmacare has used gross margin percentage [(Revenue COGS) / Revenue] to evaluate the relative profitability of its different groupings of customers (distribution outlets).

Flair recently attended a seminar on ABC and decides to consider using it at Pharmacare. Flair meets with all the key managers and many staff members. People generally agree that there are five key activity areas at Pharmacare:

Activity areas	Cost Driver
Order processing	Number of customer purchase orders
Line-items processing	Number of line items ordered by customers
Delivering to stores	Number of stores deliveries
Cartons shipped to store	Number of cartons shipped
Stocking of customer store shelves	Hours of shelf-stocking

Each customer order consists of one or more-line items. A line items represents a single product (such as Extra-Strength Tylenol Tables). Each product-line item is delivered in one or more separate cartons. Each store delivery entails the delivery of one or more cartons of product to a customer. Pharmacares staff stacks cartons directly onto display shelves in customers stores. Currently, there is no additional charge to the customer for self-stocking, and not all customers use Pharmacare for this activity. The level of each activity is the three market segments and the total cost incurred for each activity in 2022 are shown below:

Activity	General Supermarket Chains	Drugstore Chains	Mom and Pop single-store	Total Cost of Activity in 2022
Number of orders processed	150	360	1,490	$ 85,000
Number of line items ordered	1,980	4,500	14,520	69,300
Number pf store deliveries made	122	278	1,050	72,500
Number of cartons shipped to stores	37,000	24,200	17,000	78,200
Shelf-stocking (hours)	390	200	110	14,000

Required:

1. Compute the August 2022 gross margin percentage for each of Pharmacares three market segments.
2. Compute the August 2022 per-unit cost driver rate for each of the five activity areas.
3. Use the ABC information to allocate the $ 319,000 of other operating costs to each of the market segments. Compute the operating income for each market segment.
4. Comment on the results. What new insights are available with the activity-based information?