Question
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: General supermarket
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:
- General supermarket chains
- Drugstore chains
- 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:
- Compute the August 2022 gross margin percentage for each of Pharmacares three market segments.
- Compute the August 2022 per-unit cost driver rate for each of the five activity areas.
- 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.
- Comment on the results. What new insights are available with the activity-based information?
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