Generic Inc. is a distributor of pharmaceutical products. Its ABC system has five activities:

Activity AreaCost Driver Rate in 2015

1. Order processing ............................. $40 per order

2. Line-item ordering .......................... 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 Generic, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the mom-and-pop 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 2015 are as follows:

Charlesville Pharmacy Chapelville Pharmacy

Total orders .................................................... 13 ............................... 10

Average line items per order ................................. 9 ................................ 18

Total store deliveries .......................................... 7 ................................ 10

Average cartons shipped per store delivery ............... 22 ............................... 20

Average hours of shelf-stocking per store delivery ....... 0 ............................... 0.5

Average revenue per delivery ............................. $2,400 ........................ $1,800

Average cost of goods sold per delivery ................ $2,100 ........................ $1,650

Required

1. Use the ABC information to compute the operating income of each customer in August 2015. Comment on the results and what, if anything, Flair should do.

2. Flair ranks the individual customers in the mom-and-pop single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $55,680. Generic reports operating losses of $21,247 for the bottom 40% of its customers. Make four recommendations that you think Generic should consider in light of this new customer profitability information.