Reference no: EM13913668
Pharma help, Inc., a distributor of special pharmaceutical
products, operates at capacity and has three main market segments:
a. General supermarket chains
b. Drugstore chains
c. Mom-and-pop single-store pharmacies
Rick Flair, the new controller of Pharma help, reported the following data for 2014
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General Supermarket Chains
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Drugstore Chains
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Mom and Pop Single Stores
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Pharma help
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Revenues
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3,708,000
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3,150,000
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1,980,000
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8,838,000
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Cost of Goods Sold
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3,600,000
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3,000,000
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1,800,000
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8,400,000
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Gross Margin
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108,000
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150,000
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180,000
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438,000
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Other Operating Costs
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301,080
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Operating Income
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136,920
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For many years, Pharma help has used gross margin percentage [(Revenue - Cost of goods sold) ÷ Revenue]
to evaluate the relative profitability of its market segments. But Flair recently attended a seminar on activity based
costing and is considering using it at Pharma help to analyze and allocate "other operating costs." He
meets with all the key managers and several of his operations and sales staff, and they agree that there are
five key activities that drive other operating costs at Pharma help:
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
Each customer order consists of one or more line items. A line item represents a single product (such
as Extra-Strength Tylenol 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. Pharma help'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 Pharma help for this activity. The
level of each activity in the three market segments and the total cost incurred for each activity in 2014 is
as follows: Activity
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General Supermarket Chains
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Drugstore Chains
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Mom and Pop Single Stores
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Total Cost of Activity
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Orders Processed
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140
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360
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1,500
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80,000
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Line-Items Ordered
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1,960
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4,320
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15,000
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63,840
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Store Deliveries Made
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120
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360
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1,000
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71,000
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Cartons Shipped to Stores
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36,000
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24,000
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16,000
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76,000
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Shelf Stocking (hours)
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360
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180
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100
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10,240
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301,080
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1. Compute the 2014 gross-margin percentage for each of Pharma help's three market segments.
2. Compute the cost driver rates for each of the five activity areas.
3. Use the activity-based costing information to allocate the $301,080 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 costing information?
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