Posted in Customer profitability, distribution. Figure Four is a distributor of pharmaceutical products. Its ABC system has five activities:
|
Activity Area |
Cost Driver Rate in 2012 |
|
|
Order processing |
$40 per order |
|
|
Line-item ordering |
$3 per line item |
|
|
Store deliveries |
$50 per store delivery |
|
|
Carton deliveries |
$1 per carton |
|
|
Shelf-stocking |
$16 per stocking-hour |
Rick Flair, the controller of Figure Four, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the Ma and Pa 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 2012 are as follows:
|
Charleston Pharmacy |
Chapel Hill Pharmacy |
|
|
Total orders |
13 |
10 |
|
Average line items per order |
9 |
18 |
|
Total store deliveries |
7 |
10 |
|
Average cartons shipped per store delivery |
22 |
20 |
|
Average hours of shelf-stocking per store delivery |
0 |
0.5 |
|
Average revenue per delivery |
$2,400 |
$1,800 |
|
Average cost of goods sold per delivery |
$2,100 |
$1,650 |
1. Use the ABC information to compute the operating income of each customer in August 2012. Comment on the results and what, if anything, Flair should do.
2. Flair ranks the individual customers in the Ma and Pa single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $55,680. Figure Four reports operating losses of $21,247 for the bottom 40% of its customers. Make four recommendations that you think Figure Four should consider in light of this new customer profitability information.
