Reference no: EM131040201

This assignment has two parts:

-Part A: Technical or Practical

-Part B: Report writing (2 000 words)

Please note:

• Useful links: https://federation.edu.au/__data/assets/pdf_file/0015/164121/FedUni-General-Guide-to-Referencing-2014.pdf
• https://federation.edu.au/__data/assets/pdf_file/0018/190044/General-Guide-to-Writing-and-Study-Skills.pdf
• This is a group-assignment. Each group needs to have 2 to 3 members in it. Please organise yourselves into groups.
• Please make sure that names and ID numbers of all group members are stated on the cover sheet of your submission.

As this is a group assignment, each member of your group is awarded the same mark.  Working in groups has its pros and cons. I am sure that you will hold constructive and energetic group discussions on the issues at hand.  In case of any disagreements, you will be able to resolve them in a reasonable way. There will be times when you may have to agree to disagree with each other.  Invariably different group members bring different skills to a project; it is up to you to make the best of it. I believe one can learn a lot by discussing the issues with one's colleagues.

If you find your group members are "not pulling their weight" or there are problems with any member's commitment, then please try to resolve those issues amongst yourselves. Open and honest communication always helps.  If you are unable to resolve these issues, you are most welcome to see me and we will try to sort out the problems together. Do this as soon as possible and certainly before the due date.

For some reason, if you do not wish to work in a group, please let us know.

You are a management accountant at Delots Management Consultants. You have been approached by Pharmaguard Ltd regarding implementing Activity-based Costing (ABC) in its retail operations. The company has three main market segments:

• General supermarket chains
• Pharmacy chains
• Pharmacist-owned single stores

For many years, Pharmaguard has used gross margin percentage [(Revenue-Cost of goods sold) ÷ Revenue] to evaluate the relative profitability of its market segments.

Pharmaguard's segmental profit information for 2015 is given below:

Pharmaguard Ltd, 2015	General supermarket chains	Pharmacy chains	Pharmacist-owned single stores	Pharmaguard Ltd
Revenues	$3 708 000	$3 150 000	$1 980 000	$8 838 000
Cost of goods sold	3 600 000	3 000 000	1 800 000	8 400 000
Gross margin	$108 000	$150 000	$180 000	438 000
Other operating costs				301 080
Operating profit				$136 920

In your meetings with Pharmaguard staff, you have undertaken a value or activity analysis, where you have classified activities as value-added or non-value added. You have identified the five key activities that drive other operating costs at Pharmaguard:

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 store shelves	Hours of shelf-stocking

You have also identified:

• Each customer order consists of one or more line items. A line item represents a single product (e.g. Nurofen Plus 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.
• Pharmaguard'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 Pharmaguard for this activity.

The level of each activity in the three market segments and the total cost incurred for each activity in 2015 is shown below:

Activity-based cost data	Activity level
Pharmacare 2015   Activity	General supermarket chains	Pharmacy chains	Pharmacist-owned single stores	Total cost of activity in 2015
Orders processed (number)	140	360	1 500	$80 000
Line-items ordered (number)	1 960	4 320	15 000	63 840
Store deliveries made (number)	120	360	1 000	71 000
Cartons shipped to stores (number)	36 000	24 000	16 000	76 000
Shelf-stocking (hours)	360	180	100	10 240
				$301 080

Required:

a. Compute the 2015 gross-margin percentage for each of Pharmaguard's three market segments.

b. Compute the cost driver rates for each of the five activity areas.

c. Use the activity-based costing information to allocate the $301080 of "other operating costs" to each of the market segments. Compute the operating profit for each market segment.

d. Comment on the results. What new insights are available with the ABC information?

e. The senior management at Phramaguard plans to implement ABC in its retail operations, manufacturing operations and its medical centre operations. The staff in these divisions are not in favour of implementing ABC and the Activity-based management (ABM). They are resisting these changes. Some employees are questioning, "why does the company need to change at all"?

f. As a consultant, give your professional advice on the benefits and limitations of adopting ABC for all its all operations at Pharmaguard.