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

Activity Area Cost Driver Rate in 2006

1. Oder processing .............. $40 per order

2. Line - item order ............ $3 per line item

3. Store deliveries ............... $50 per store delivery

4. Carton deliveries ............ $1 per carton

5. Shelf stocking ................ $16 per stocking hour

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 2006 are as follows:

Required
1. Use the ABC information to compute the operating income of each customer in August 2006. Comment on the results.
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?

Transcribed Image Text:

Charleston Chapel Hill Pharmacy Pharmacy Total orders Average line items per order 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 12 10 24 $2,400 10 18 10 20 0.5 $1,800 $1,650 $2,100