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Activity Area 1. Order processing Cost Driver Rate in 2017 $42 per order $5 per line item 2. Line-item ordering 3. Store deliveries $47 per store delivery $4 per carton $13 per stocking-hour 4. Carton deliveries 5. Shelf-stocking Rick Flair, the controller of Best Drugs, wants to use this ABC system to examine individual customer profit- ability 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: San Diego Pharmacy Ann Arbor Pharmacy Total orders 13 Average line items per order 11 19 Total store deliveries Average cartons shipped per store delivery Average hours of shelf-stocking per store delivery Average revenue per delivery Average cost of goods sold per delivery 21 18 0.5 0.75 $1,900 $2,600 $2,100 $1,700 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. 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 rec- ommendations that you think Best Drugs should consider in light of this new customer-profitability information. Required

Activity Area 1. Order processing Cost Driver Rate in 2017 $42 per order $5 per line item 2. Line-item ordering 3. Store deliveries $47 per store delivery $4 per carton $13 per stocking-hour 4. Carton deliveries 5. Shelf-stocking Rick Flair, the controller of Best Drugs, wants to use this ABC system to examine individual customer profit- ability 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: San Diego Pharmacy Ann Arbor Pharmacy Total orders 13 Average line items per order 11 19 Total store deliveries Average cartons shipped per store delivery Average hours of shelf-stocking per store delivery Average revenue per delivery Average cost of goods sold per delivery 21 18 0.5 0.75 $1,900 $2,600 $2,100 $1,700 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. 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 rec- ommendations that you think Best Drugs should consider in light of this new customer-profitability information. Required

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Customer profitability, distribution. Best Drugs is a distributor of pharmaceutical products. Its ABC system has five activities:

Activity Area 1. Order processing Cost Driver Rate in 2017 $42 per order $5 per line item 2. Line-item ordering 3. Store deliveries $47 per store delivery $4 per carton $13 per stocking-hour 4. Carton deliveries 5. Shelf-stocking Rick Flair, the controller of Best Drugs, wants to use this ABC system to examine individual customer profit- ability 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: San Diego Pharmacy Ann Arbor Pharmacy Total orders 13 Average line items per order 11 19 Total store deliveries Average cartons shipped per store delivery Average hours of shelf-stocking per store delivery Average revenue per delivery Average cost of goods sold per delivery 21 18 0.5 0.75 $1,900 $2,600 $2,100 $1,700 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. 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 rec- ommendations that you think Best Drugs should consider in light of this new customer-profitability information. Required
Transcribed Image Text:Activity Area 1. Order processing Cost Driver Rate in 2017 $42 per order $5 per line item 2. Line-item ordering 3. Store deliveries $47 per store delivery $4 per carton $13 per stocking-hour 4. Carton deliveries 5. Shelf-stocking Rick Flair, the controller of Best Drugs, wants to use this ABC system to examine individual customer profit- ability 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: San Diego Pharmacy Ann Arbor Pharmacy Total orders 13 Average line items per order 11 19 Total store deliveries Average cartons shipped per store delivery Average hours of shelf-stocking per store delivery Average revenue per delivery Average cost of goods sold per delivery 21 18 0.5 0.75 $1,900 $2,600 $2,100 $1,700 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. 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 rec- ommendations that you think Best Drugs should consider in light of this new customer-profitability information. Required
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