Question

Given the information below, complete the following requirements:

A. Rank the customers by their gross margin as a percent of sales revenue.

B. Perform customer profitability analysis by generating an operating income for each customer segment through the use of activity-based costing.

C. Rank segments by their respective operating income as a percent of sales.

D. If the relative rankings of the segments using operating income as a percent of sales is different from the relative rankings using gross margin as a percent of sales, then provide two reasons why this change might have occurred.

Space is provided on the following two pages for your answer. Be sure to show your work for partial credit should you make an error.

Pharmacy

Hospital

HMO

Clinics

Revenue

$1,000,000

$1,200,000

$800,000

$600,000

CGS

$670,000

$720,000

$560,000

$390,000

Activity

Rate

Cost Driver

Order taking

$200.00

per purchase order

Information requests

$350.00

per request

Sales calls

$400.00

per sales call

Distribution

$150.00

per delivery

Expedited orders

$500.00

per expedited order

Activity Cost Driver Quantities

Activity Cost Driver

Pharmacy

Hospital

HMO

Clinics

Number of purchase orders

100

200

20

80

Number of requests

50

100

20

20

Number of sales calls

50

200

10

40

Number of deliveries

80

100

10

40

Number of expedited orders

40

150

8

60

Answer 1

A)	Revenue	CGS	Gross margin	Rank
Pharmacy	1000000	670000	330000	2
Hospital	1200000	720000	480000	1
HMO	800000	560000	240000	3
Clinics	600000	390000	210000	4

	Pharmacy	Hospital	Clinics	HMO
B)	No. of activity drivers	Total	No. of activity drivers2	Total3	No. of activity drivers3	Total5	No. of activity drivers4	Total7
Gross Margin	0	330000	0	480000	0	240000	0	210000
Less:
Purchase order Costs ( 200 )	100	20000	200	40000	20	4000	80	16000
Information request costs( 350 )	50	17500	100	35000	20	7000	20	7000
Sales call cost (400)	50	20000	200	80000	10	4000	40	16000
Delivery Cost (150)	80	12000	100	15000	10	1500	40	6000
Expediate order cost(500)	40	20000	150	75000	8	4000	60	30000
Operating income		240500		235000		219500		135000

C)

C)	Operating income	Rank
Pharmacy	240500	1
Hospital	235000	2
HMO	219500	3
Clinics	135000	4

D) Reasons:

1) Gross margin considers the only cost of goods sold while Operating income approach considers both cost of goods sold and Operating expense

2)Gross margin explains whether the company is capable of producing the goods whose sales exceed cost

while the operating margin explains how much net profit will be available for the company