Quality Supply is a distributor of pharmaceutical products I

Quality Supply is a distributor of pharmaceutical products. Its ABC system has five activities:

Activity Area

Cost Driver Rate in 2013

1.

Order processing

$44 per order

2.

Line-item ordering

$7 per line item

3.

Store deliveries

$49 per store delivery

4.

Carton deliveries

$1 per carton

55.

Shelf-stocking

$16 per stocking-hour

Rick? Flair, the controller of Quality Supply?, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the Ma and Pa? single-store distribution market. Using only two customers helps highlight the insights available with the ABC approach. Data pertaining to these two customers in August 2013 are as? follows:

Dallas Pharmacy

Buffalo Pharmacy

Total orders

11

13

Average line items per order

11

15

Total store deliveries

8

11

Average cartons shipped per store delivery

19

18

Average hours of shelf-stocking per store delivery

0.25

0.75

Average revenue per delivery

$2,650

$1,950

Average cost of goods sold per delivery

$2,150

$1,600

Use the ABC information to compute the operating income of each customer in August 2013. Comment on the results and? what, if? anything, Flair should do. ?(Round your answers to the nearest whole dollar. Use parentheses or a minus sign for operating? losses.)

Revenues

Cost of goods sold

Gross margin

Operating costs

Operating income(loss)

Activity Area	Cost Driver Rate in 2013
1.	Order processing	$44 per order
2.	Line-item ordering	$7 per line item
3.	Store deliveries	$49 per store delivery
4.	Carton deliveries	$1 per carton
55.	Shelf-stocking	$16 per stocking-hour

Solution

Calculation of costs allocated to each prodcut using ABC (Amounts in $)

Total Revenues for Dallas pharmacy = Avg revenue per delivery*Store deliveries

= $2,650*8 = $21,200

Total Revenues for Buffalo pharmacy = $1,950*11 = $21,450

Cost of goods sold for Dallas pharmacy = Avg COGS per delivery*Store deliveries

= $2,150*8 = $17,200

Cost of goods sold for Buffalo pharmacy = $1,600*11 = $17,600

Calculation of Operating Income for each customer (Amounts in $)

Operating income from Dallas pharmacy of $2,173 is more than operating income from Buffalo pharmacy of $1,044.

Activity Area	Dallas Pharmacy	Buffalo Pharmacy
Order processing (Orders*$44 per order)	(11*$44) = 484	(13*$44) = 572
Line-item ordering (Avg line item per order*Orders*$7 per line item)	(11*11*$7) = 847	(15*13*$7) = 1,365
Store Deliveries (Store deliveries*$49 per store delivery)	(8*$49) = 392	(11*$49) = 539
Carton Deliveries (Avg cartons per store delivery*store deliveries*$1 per carton)	(19*8*$1) = 72	(18*11*$1) = 198
Shelf Stocking (Avg shelf stocking hrs*store deliveries*$16 per stocking hour)	(0.25*8*$16) = 32	(0.75*11*$16) = 132
Total costs allocated	1,827	2,806