SPL Agencies specializes in the distribution of pharmaceutical products. They buy from pharmaceutical companies and resells to each of three different markets. • General supermarket chains (GSC) • Drugstore chains (DC) • M and P Single-store pharmacies (MPS) The management Accountant of SPL Agencies reported the following data for August 2003. GSC DC MPS Average Revenue per delivery (shs) 30,900 10,500 1,980 Average cost of goods sold per delivery (shs) 30,000 10,000 1,800 Number of deliveries 120 300 1,000 SPL Agencies has been using gross margin percentage {(Revenue ÷ Cost of Goods sold)÷ Revenue}to evaluate the relative profitability of its customers groups (distribution outlets). The management Accountant recently attended a seminar on activity based costing and decides to consider using it at SPL Agencies. The management Accountant meets with all the senior manages and other middle level managers. Generally, these individuals agree that there are five key activity areas at SPL Agencies. Activity Area Cost Driver 1. Customer purchasing order processing 1. Purchase orders by customers 2. Line item ordering 2. Line items per purchase order 3. Store delivery 3. Store deliveries 4. Cartons shipped to stores 4. Cartons shipped to a store per delivery 5. Shelf-stocking at customer store 5. Hours of shelf-stocking Each customer purchase order consists of one or more line items. A line item represents a single product (such as Actifed Panadol Tablets). Each store delivery entails the delivery of one or more cartons of products to a customer. Each product is delivered in one or more separate cartons. SPL Agencies staff stack cartons directly onto display shelves in a store. Currently, there is no charge for this service and not all customers use SPL Agencies for this activity. The August 2003 operating costs (other than cost of goods sold) of SPL Agencies are Shs 301,080. These operating costs are assigned to the five activity areas. The costs in each area and the quantity of the costs allocation base used in that area for August 2003 are as follows: Activity Area Total costs August 2003 (shs) Total units of cost allocation base used in August 2003 1. Customer purchase order processing 80,000 2,000 orders 2. Line – item ordering 63,840 21,280 line items 3. Store deliveries 71,000 1,420 store deliveries 4. Cartons shipped to stores 76,000 76,000 cartons 5. Shelf stocking at customer stores 10,240 640 hours 301,080 Other data for August 2003 include the following: GSC DC MPS Total number of orders 140 360 1,500 Average number of line items per order 14 12 10 Total number of cartons shipped per store delivery 300 80 16 Total number of store deliveries 120 300 1,000 Average number of hours of shelf – stocking per store delivery 3 0.6 0.1 Required: (a) Compute the August 2003 gross – margin percentage for each of its three distribution markets and SPL Agencies operating income. (b) Compute the August 2003 rate per unit of the cost allocation base for each of the five activity areas. Compute the operating income of each distribution market in August 2003 using the activity based costing information. Comment on the results
