Pharmahelp, 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 Rick Flair, the new controller of Pharmahelp, reported the following data for 2014

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

Each customer order consists of one or more line items. A line item represents a single product (such as Extra-Strength Tylenol Tablets). Each product line item is delivered in one or more separate cartons. Each store delivery entails the delivery of one or more cartons of products to a customer. Pharmahelp’s staff stacks cartons directly onto display shelves in customers’ stores. Currently, there is no additional charge to the customer for shelf-stocking and not all customers use Pharmahelp for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2014 is as follows:

Required
1. Compute the 2014 gross-margin percentage for each of Pharmahelp’s three market segments.
2. Compute 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?

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Pharmahelp, 2014 General Supermarket Drugstore Mom-and-Pop Chains Chains Single Stores |Pharmahelp $3,708,000 3,150,000 $1,980,000 $8,838,000 1800.0008400.000 108,000 $150,000 S 180,000 438,000 301,080 Revenues sold 3,600,000 | 3,000,000 Gross margin Other operating costs Operating inoome Activity Area Order processing Line-item processing Delivering to stores Cartons shipped to store Stocking of customer store shelves Cost Driver Number of customer purchase orders Number of line items ordered by customers Number of store deliveries Number of cartons shipped Hours of shelf-stocking Activity-based Cost Data Activity Level 2014 Total Cost SupermarketDrugstore Mom-and-Pop of Activity Chains Single Stores in 2014 General Activity Orders processed (number) Line-items ordered (number) Store deliveries made (number) Cartons shipped to stores (number Shelf stocking (hours) Chains 140 1,960 120 36,000 360 1,500 4.32015,000 300 63,840 71,000 6,000 10,240 $301.090 360 24,000 1 16,000 100 180