Question

Pharmacy Company has two customers CVX and Ma & Pa with data as follows:

	CVX	Ma & Pa
Selling price per unit	$40.00	$40.00
Units Sold	4,500	3,800
Manufacturing Cost per unit	$14.00	$14.00
Number of Purchase Orders	25	155
Number of Deliveries	107	183
Number of Expedited deliveries	189	250
Customer Visits	44	85

Pharmacy Company’s management accountant gathered the following ABC rate information:

	ABC Cost Rate
Purchase Orders	$216 per purchase order
Deliveries	$112 per delivery
Expedited Deliveries	$131 per expedited delivery
Customer Visits	$ 62 per customer visit

Using the information in the tables above and allocating indirect support costs using ABC to customers, what is the Operating Income for the CVX customer?

Multiple Choice

• $ 59,400

• $ 72,129

• $ 117,000

Answer 1

Working Notes:
	Calculation of the Overhead Cost as per ABC Method for CVX Method
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Number if Purchase Orders	25	"X " By	$             216.00	$                     5,400
	Number of Deliveries	107	"X " By	$             112.00	$                   11,984
	Number of Expedited Deliveries	189	"X " By	$             131.00	$                   24,759
	Customer Visit	44	"X " By	$               62.00	$                     2,728
		Total Cost			$                   44,871
Solution :
	Calculation of the Operating Income For the CVX Customer
	Sales (4,500 Units X $ 40)	$                      1,80,000
	Less: Expenses
	Manufacturing Cost (4,500 Units X $ 14)	63,000
	Overhead Cost as per ABC(WN1)	44,871
	Customer Visit
	Total Expenses	$                      1,07,871
	Net Income	$                          72,129
Answer = Option 2 = $ 72,129