Question

Advanced Pharmaceuticals, Inc., is a wholesale distributor of prescription drugs to independent retail and hospital-based pharmacies. Management believes that top-notch customer representatives are the key factor in determining whether the company will be successful in the future. Customer representatives serve as the company’s liaison with customers—helping pharmacies monitor their stocks, delivering drugs when customer stocks run low, and providing up-to-date information on drugs from many different companies. Customer representatives must be ultra-reliable and are highly trained. Good customer representatives are hard to come by and are not easily replaced. Customer representatives routinely record the amount of time they spend serving each pharmacy. This time includes travel time to and from the company’s central warehouse as well as time spent replenishing stocks, dealing with complaints, answering questions about drugs, informing pharmacists of the latest developments and newest products, reviewing bills, explaining procedures, and so on. Some pharmacies require more hand-holding and attention than others and consequently they consume more of the representatives’ time. Recently, customer representatives have made more frequent complaints that it is impossible to do their jobs without working well beyond normal working hours. This has led to an alarming increase in the number of customer representatives quitting for jobs in other organizations. As a consequence, management is considering dropping some customers to reduce the workload on customer representatives. Data concerning a representative sample of the company’s customers appears below: Leafcrest Pharmacy Providence Hospital Pharmacy Madison Clinic Pharmacy Jenkins Pharmacy Total revenues $328,860 $3,056,380 $1,487,010 $208,550 Cost of drugs sold $232,470 $2,248,480 $1,133,440 $129,920 Customer service costs $10,710 $76,500 $45,500 $7,980 Customer representative time 255 1,380 630 150 Customer service costs include all of the costs—other than the costs of the drugs themselves—that could be avoided by dropping the customer. These costs include the hourly wages of the customer representatives, their sales commissions, the mileage-related costs of the customer representatives’ company-provided vehicles, and so on. Required: 1. Rank the four customers in terms of their profitability. 2. Customer representatives are currently paid $40 per hour plus a commission of 1% of sales revenues. If these four pharmacies are indeed representative of the company’s customers, could the company afford to pay its customer representatives more in order to retain them? Yes No

Answer 1

1) The constraint is customer representatives’ time and the incremental profit is revenues less cost of drugs sold and customer service costs.
	Leafcrest Pharmacy	Providence Hospital Pharmacy	Madison Clinic Pharmacy	Jenkins Pharmacy
Total revenues	$ 3,28,860.00	$ 30,56,380.00	$ 14,87,010.00	$ 2,08,550.00
Cost of drugs sold	$ 2,32,470.00	$ 22,48,480.00	$ 11,33,440.00	$ 1,29,920.00
Customer service costs	$    10,710.00	$      76,500.00	$      45,500.00	$      7,980.00
Incremental profit (a)	$    85,680.00	$   7,31,400.00	$   3,08,070.00	$    70,650.00
Customer representative time (b)	255	1380	630	150	hours
Profitability index (a) ÷ (b)	$         336.00	$           530.00	$           489.00	$         471.00	Per hour
	4 th	1 st	2 nd	3 rd
The Providence Hospital Pharmacy is the most profitable of the customers, followed by the Madison Clinic Pharmacy, the Jenkins Pharmacy, and lastly the Leafcrest Pharmacy.
2)
Yes
The company could certainly afford to pay its customer representatives more in order to attract and retain them. The company makes at least $336 in incremental profit per hour of customer representative time after taking into account their current wages and commissions