Q1
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.
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 2017 is as follows:
Required
1. Compute the 2017 gross-margin percentage for each of Pharmahelp’s three market
segments.
2. Compute the cost driver rates (activity rates/allocation 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?