Medtech, 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 Evan Kennedy, the new controller of Medtech, reported the following data for 2013:

For many years, Medtech has used gross margin percentage [(Revenue – Cost of goods sold) , Revenue] to evaluate the relative profitability of its market segments. However, Kennedy recently attended a seminar on activity- based costing and is considering using it at Medtech 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 Medtech:

Required
1. Compute the 2013 gross- margin percentage for each of Medtech’s three market segments.
2. ompute the cost driver rates for each of the five activity areas.
3. 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.
4. Comment on the results. What new insights are available with the activity- based costinginformation?

Transcribed Image Text:

General Supermarket Chains $3,708,000 3,600,000 $108,000 Drugstore Chains $3,150,000 3,000,000 150,000 Mom-and-Pop Single StoreMedtech Revenues Cost of goods sold Gross margin Other operating costs Operating income $1,980,000 1,800,000 180,000 $8,838,000 8,400,000 438,000 301,080 $ 136,920