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

	General Supermarket Chains	Drugstore Chains	Mom and Pop Single Stores	Pharma help
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 Income				136,920

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

	General Supermarket Chains	Drugstore Chains	Mom and Pop Single Stores	Total Cost of Activity
Orders Processed	140	360	1,500	80,000
Line-Items Ordered	1,960	4,320	15,000	63,840
Store Deliveries Made	120	360	1,000	71,000
Cartons Shipped to Stores	36,000	24,000	16,000	76,000
Shelf Stocking (hours)	360	180	100	10,240
				301,080

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?