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

Rick Flair, the controller of Figure Four, 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. Two customers are used to exemplify the insights available with the ABC approach. Data pertaining to these two customers in August 2009 are as follows:

1. Use the ABC information to compute the operating income of each customer in August 2009. 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 $55,680. Figure Four reports operating losses of $21,247 for the bottom 40% of its customers. Make four recommendations that you think Figure Four should consider in light of this new customer-profitability information.

Cost Driver Rate in 2009 $40 per order $3 per line item Activity Area 1. Order processing 2. Line-item ordering 3. Store deliveries 4. Carton deliveries 5. Shelf-stocking $50 per store delivery $1 per carton $16 per stocking-haur