5-37 (Activity-based costing, merchandising.) 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 2017.

Pharmahelp, 2017	General
	Supermarket	Drugstore	Mom-and-Pop	Total for
	Chains	Chains	Single Stores	Pharmahelp
Revenues	$3,708,000	$3,150,000	$1,980,000	$8,838,000
Cost of goods sold	$3,600,000	$3,000,000	$1,800,000	$8,400,000
Gross margin	$108,000	$150,000	$180,000	$438,000
Other operation costs				$301,080
Operation income				$136,920

For many years, Pharmahelp has used gross margin percentage [(Revenue-Cost of goods sold / Revenue] to evaluate the relative protability 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 ve key activities that drive other operating costs at Pharmahelp:

Activity Area Cost Driver

__________________________________________________________________

Order processing Number of customer purchase orders

Line-item processing Number of line items ordered by customers

Delivering to stores Number of store deliveries

Cartons shipped to store Number of cartons shipped

Stocking of customer store shelves Hours of shelf-stocking

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. Pharmahelps 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 2017 is as follows:

Pharmahelp, 2017	General
	Supermarket	Drugstore	Mom-and-Pop	Total for
	Chains	Chains	Single Stores	Pharmahelp
Order processed (number)	140	360	1,500	$80,000
Line-item (number)	1,960	4,320	15,000	$63,840
Store deliveries made (number)	120	360	1,000	$71,000
Cartons shipped to stores (number)	36,000	24,000	16,000	$76,000
Shelf stocking (hours)	360	180	100	$10,240
				$301,080

Shown calculations for the following:

1. Compute the 2017 gross-margin percentage for each of Pharmahelps 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 costing information?