Quality Supply is a distributor of pharmaceutical products. Its ABC system has f
ID: 2391994 • Letter: Q
Question
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
Explanation / Answer
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