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14-21(2025 min.)  Customer profitability, distribution.

1.The activity-based costing for each customer is:

Charleston

Pharmacy

Chapel Hill

Pharmacy

1.Order processing,

$40 × 12; $40 × 10$  480$  400

2.Line-item ordering,

$3 × (12 × 10;10 × 18)360540

3.Store deliveries,

$50 × 6; $50 ×10300500

4.Carton deliveries,

$1 × (6 × 24; 10 × 20)144200

5.Shelf-stocking,

$16 × (6 × 0; 10 × 0.5)         0      80

Operating costs$1,284$1,720

The operating income of each customer is:

Charleston

Pharmacy

Chapel Hill

Pharmacy

Revenues,

$2,400 × 6; $1,800 × 10$14,400$18,000

Cost of goods sold,

$2,100 × 6; $1,650 × 10  12,600  16,500

Gross margin1,8001,500

Operating costs    1,284   1,720

Operating income$     516$   (220)

Chapel Hill Pharmacy has a lower gross margin percentage than Charleston (8.33% vs. 12.50%) and consumes more resources to obtain this lower margin.

2.

Ways Figure Four could use this information include:

a.Pay increased attention to the top 20% of the customers.  This could entail asking them for ways to improve service.  Alternatively, you may want to highlight to your own personnel the importance of these customers; e.g., it could entail stressing to delivery people the importance of never missing delivery dates for these customers.

b.Work out ways internally at Figure Four to reduce the rate per cost driver; e.g., reduce the cost per order by having better order placement linkages with customers.  This cost reduction by Figure Four will improve the profitability of all customers.

c.Work with customers so that their behavior reduces the total "system-wide" costs.  At a minimum, this approach could entail having customers make fewer orders and fewer line items.  This latter point is controversial with students; the rationale is that a reduction in the

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