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)

Answer 1

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

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

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 $)

Particulars	Dallas Pharmacy	Buffalo Pharmacy
Revenues	21,200	21,450
Less: Cost of goods sold	(17,200)	(17,600)
Gross Margin	4,000	3,850
Less: Operating costs	(1,827)	(2,806)
Operating Income(loss)	2,173	1,044

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