Question
You are an account manager at Owens & Minor, a distributor of hospital supplies. You have two customers, Alpha Hospital and Beta Hospital. Your value
You are an account manager at Owens & Minor, a distributor of hospital supplies. You have two customers, Alpha Hospital and Beta Hospital. Your value proposition is to provide each customer with high-quality hospital supplies at the time, in the order quantity, and through the sales channel (online orders or through salespeople) desired by the hospital. Below are your companys direct product cost and activity rates, and each customers activity levels.
Direct (Traceable) Cost per unit sold | $3.46/unit |
Other Cost Pool (organization-sustaining overhead & cost of excess capacity) | $200,000 per year |
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Activity Overhead Rates | |
Manufacturing overhead Cost | $1.54/unit sold |
Online Order Cost | $5.00/online order |
Salespeople Order Cost | $10.00/salesperson order |
Emergency Order Cost Premium | $70/emergency order |
Delivery overhead Cost | $500/delivery |
Activity Levels | Alpha Hospital | Beta Hospital |
Units of product ordered/year | 15,000 units | 10,000 units |
Total Orders/year | 1200 orders | 300 orders |
Emergency Orders (included in the total above)/year | 150 emergency orders | 30 emergency orders |
% of orders that are placed online | 25% of total orders | 80% of total orders |
% of orders that are placed with salespeople | 75% of total orders | 20% of total orders |
Deliveries/year | 12 deliveries | 15 deliveries |
Problem 2 Assume that your company, Owens & Minor, currently charges a $8.00 selling price per unit to each of its customers. Create a customer profitability statement for each customer. Calculate profitability in both total dollar and per-unit terms.
Hint: Subtract both the direct (traceable) costs and the activity-based allocated overhead costs from the sales revenue generated by each customer. Here is a template if you wish to use it:
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Units Sold |
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Revenue or Selling Price |
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Direct Cost |
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Manufacturing Overhead Activity |
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Online Order Activity |
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Salesperson Order Activity |
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Emergency Order Activity |
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Delivery Activity |
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Product Cost |
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Product Margin |
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Product Margin % |
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