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Question 3: Case study on Star Pharma Star Pharma is a pharmaceutical firm operating in Singapore....

Question 3: Case study on Star Pharma
Star Pharma is a pharmaceutical firm operating in Singapore. It serves two channels: (a) small
pharmacy stores and (b) large pharmacy stores. Star Pharma has four customers in total, two
of which are small pharmacies (C1 and C2) and the other two are large pharmacies (C3 and
C4). Star Pharma uses a discount pricing strategy and prices its products at variable cost plus
25%.
Relevant data for the year 2019 is as follows:
Particulars C1 C2 C3 C4
Number of orders 4 9 6 3
Average order value before discount $40,000 $20,000 $425,000 $400,000
Average discount 4.5% 9.5% 17.5% 11.5%
Regular deliveries 4 9 6 3
Expedited deliveries 2 0 2 0
Other important information:
Variable cost of goods sold amount to 80% of gross sales for each customer.
The general administration cost to small pharmacies for the year 2019 was $20,250 and the
general administration cost to serve large pharmacies was $48,375.
The total order processing cost for the year 2019 was $16,500. The cost driver for order
processing cost was number of orders.
The total cost for making regular deliveries in the year 2019 was $8,250. The cost driver for
regular delivery cost was number of regular deliveries made.
The total cost for expedited deliveries in the year 2019 was $5,000. The cost driver for
expedited delivery cost was number of expedited deliveries made.
Required:
(a) Calculate the activity cost driver rates for order processing, regular deliveries and
expedited deliveries.
(b) Prepare a customer profitability statement that shows the contribution and operating
profit from each customer and each customer channel.

Solutions

Expert Solution

(a)

Sl. No Particulars C1 C2 C3 C4 Total
1 No.Of orders 4 9 6 3 22
2 Regular deliveries 4 9 6 3 22
3 Expedited Deliveries 2 0 2 0 4

Calculation of activity cost driver rates for Order processing, Regular deliveries and expedited deliveries-

Cost pool (A) Cost Driver (B) Cost Driver Rate (A/B)
Total Order processing cost 16500 No.Of orders 22 750
Total regular deliveries cost 8250 Regular deliveries 22 375
Total expedited deliveries cost 5000 Expedited Deliveries 4 1250

(b)

Sl no. Particulars Small Pharmacies Large Pharmacies
C1 C2 C3 C4
a Order value before discount            40,000.00         20,000.00         4,25,000.00    4,00,000.00
b Variable cost (a*80%)            32,000.00         16,000.00         3,40,000.00    3,20,000.00
c Average discount 4.50% 9.50% 17.50% 11.50%
d Discount(a*c)              1,800.00           1,900.00             74,375.00       46,000.00
e Sale value (a-d)            38,200.00         18,100.00         3,50,625.00    3,54,000.00
f Variable cost of goods sold(b)            32,000.00         16,000.00         3,40,000.00    3,20,000.00
g Contribution(e-f)              6,200.00           2,100.00             10,625.00       34,000.00
h Total Contribution from each channel(C1+C2 & C3+C4)                                            8,300.00                                         44,625.00

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