Chapter 14, Problem 14.21E

Customer profitability, distribution. Best Drugs is a distributor of pharmaceutical products. Its ABC system has five activities:

Activity Area	Cost Driver Rate in 2017
1. Order processing	$42 per order
2. Line-item ordering	$5 per line item
3. Store deliveries	$47 per store delivery
4. Carton deliveries	$4 per carton
5. Shelf-stocking	$13 per stocking-hour

Rick Flair, the controller of Best Drugs, 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 2017 are as follows:

	Ann Arbor Pharmacy	San Diego Pharmacy
Total orders	13	7
Average line items per order	11	19
Total store deliveries	5	7
Average cartons shipped per store delivery	21	18
Average hours of shelf-stocking per store delivery	0.5	0.75
Average revenue per delivery	$2,600	$1,900
Average cost of goods sold per delivery	$2,100	$1,700

1. 1. Use the ABC information to compute the operating income of each customer in August 2017. Comment on the results and what, if anything, Flair should do.

Required

1. 2. Flair ranks the individual customers in the Ma and Pa single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $58,120. Best Drugs reports operating losses of $23,670 for the bottom 40% of its customers. Make four recommendations that you think Best Drugs should consider in light of this new customer-profitability information.