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

Activity Area	Cost Driver Rate in 2018
1. Order processing	S40 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 2018 are as follows:

Required
1. Use the ABC information to compute the operating income of each customer in August 2018. 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 recommenda tions that you think Generic should consider in light of this new customer profitability information.

Transcribed Image Text:

Charlesville Chapelville Pharmacy Pharmacy Total orders 13 10 Average line items per order 18 Total store deliveries 10 Average cartons shipped per store delivery 22 20 Average hours of shelf-stocking per store delivery 0.5 Average revenue per delivery $2,400 $1,800 Average cost of goods sold per delivery $2,100 $1,650 9,