TASK SIX Merchandising. Pharma help, Inc., a distributor of special pharmaceutical products, operates at capacity and has three main market segments: a. General supermarket chains b. Drugstore chains c. Mom-and-pop single-store pharmacies Rick Flair, the new controller of Pharma help, reported the following data for 2020 General Supermarket Chains Drug store Chains Mom and Pop Single Stores Total Phrmahelp Revenues $3,708,000 3,150,000 1,980,000 8,838,000 Cost of Goods Sold 3,600,000 3,000,000 1,800,000 8,400,000 Gross Margin 108,000 150,000 180,000 438,000 Other Operating exp (301,080) Operating Income 136,920 For many years, Pharmahelp has used gross margin percentage [(Revenue - Cost of goods sold)/ Revenue] to evaluate the relative profitability of its market segments. But Flair recently attended a seminar on activity-based costing and is considering using it at Pharmahelp to analyze and allocate “other operating costs.” He meets with all the key managers and several of his operations and sales staff, and they agree that there are five key activities that drive other operating costs at Pharmahelp: Activity Area Cost Driver Order processing Number of customer purchase order Line-item processing Number of line items ordered by customers Delivering to stores Number of store deliveries Cartons shipped to store Number of cartons shipped Stocking of customer store shelves Hours of shelf-stocking General Supermarket Drug store Mom and Pop Total cost of Activity Activity Chains Chains Single Stores Orders Processed (number) 140 360 1,500 $80,000 Line Items ordered (number) 1960 4,320 15,000 63,840 Store Deliveries made (number) 120 360 1,000 71,000 Cartons shipped to stores (number) 36,000 24,000 16,000 76,000 Shelf Stocking (hours) 360 180 100 10,240 $301,080 Required: Compute the 2020 gross-margin percentage for each of Pharmahelp’s three market segments. Compute the cost driver rates for each of the five activity areas. Use the activity-based costing information to allocate the $301,080 of “other operating costs” to each of the market segments. Compute the operating income for each market segment.
TASK SIX
Merchandising. Pharma help, Inc., a distributor of special pharmaceutical products, operates at capacity and has three main market segments: a. General supermarket chains b. Drugstore chains c. Mom-and-pop single-store pharmacies Rick Flair, the new controller of Pharma help, reported the following data for 2020
|
|
General Supermarket Chains |
Drug store Chains |
Mom and Pop Single Stores |
Total Phrmahelp |
|
Revenues |
$3,708,000 |
3,150,000 |
1,980,000 |
8,838,000 |
|
Cost of Goods Sold |
3,600,000 |
3,000,000 |
1,800,000 |
8,400,000 |
|
Gross Margin |
108,000 |
150,000 |
180,000 |
438,000 |
|
Other Operating exp |
|
|
|
(301,080) |
|
Operating Income |
|
|
|
136,920 |
For many years, Pharmahelp has used gross margin percentage [(Revenue - Cost of goods sold)/ Revenue] to evaluate the relative profitability of its market segments. But Flair recently attended a seminar on activity-based costing and is considering using it at Pharmahelp to analyze and allocate “other operating costs.” He meets with all the key managers and several of his operations and sales staff, and they agree that there are five key activities that drive other operating costs at Pharmahelp:
Activity Area Cost Driver
Order processing Number of customer purchase order Line-item processing Number of line items ordered by customers
Delivering to stores Number of store deliveries
Cartons shipped to store Number of cartons shipped
Stocking of customer store shelves Hours of shelf-stocking
|
|
General Supermarket |
Drug store |
Mom and Pop |
Total cost of Activity |
|
Activity |
Chains |
Chains |
Single Stores |
|
|
Orders Processed (number) |
140 |
360 |
1,500 |
$80,000 |
|
Line Items ordered (number) |
1960 |
4,320 |
15,000 |
63,840 |
|
Store Deliveries made (number) |
120 |
360 |
1,000 |
71,000 |
|
Cartons shipped to stores (number) |
36,000 |
24,000 |
16,000 |
76,000 |
|
Shelf Stocking (hours) |
360 |
180 |
100 |
10,240 |
|
|
|
|
|
$301,080 |
Required:
- Compute the 2020 gross-margin percentage for each of Pharmahelp’s three market segments.
- Compute the cost driver rates for each of the five activity areas.
- Use the activity-based costing information to allocate the $301,080 of “other operating costs” to each of the market segments. Compute the operating income for each market segment.
- Comment on the results. What new insights are available with the activity-based costing information?
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