Question for Accounting Internal Decision Making

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Assignment Questions for Owens and Minor Inc. (A) 9-100-055
Work through the following numerical exercise by filling in the template provided:
(A) You are an account manager at Owens & Minor. You have two customers on a
stockless program. Below are each customer’s activity levels, activity rates, and
customer level costs. See Alpha Hospital — Customer Profitability Statement (Exhibit 4
in Owens & Minor, Inc. Case A). Draft a customer profitability statement for Beta
Hospital by filling in the template provided.
Activity Rates
Edi Order Cost
Non-Edi Order Cost
Line Cost
Delivery Cost
Interest Cost
Emergency Order Cost
Shipping and Handling Cost
Customer Level Costs
$4.50/edi order Costs
Procurement
$
Labeling
$9.01/non-edi order
$0.66/line Account Mgmt
$457.58/delivery Occupancy
8.64%per annum Group Fees
$25/emergency order
$130/delivery
Activity Levels
Alpha Hospital
Sales/month
$
Orders/month
Lines/month
Deliveries/month
% EDI orders
Accounts Receivable
Emergency Orders/Month
Vendor Discounts
Cost-Plus
%
1,486
1,000
991
1,007
750
Beta Hospital
150,000 $
750
15,000
12
25%
$300,000
20
$4035
15.0%
150,000
333
10,000
10
95%
$75,000
10
$4035
15.0%
(B) It is one year later. Both your customers switched to Activity-Based Pricing (ABP)
nine months ago. You charge each customer what it costs you to provide service, making
margin only on distributor discounts. Draft new customer profitability statements for
both Alpha Hospital and Beta Hospital using the new activity drivers shown below. What
is the cost-plus equivalent of the activity fee each customer is charged? Explain why
each customer responded differently to activity-based pricing.
Alpha Hospital
Activity Levels
Sales
$
Beta Hospital
150,000
$
300,000
Orders/month
400
660
Lines/month
11,000
20,000
Deliveries/month
% EDI orders
Accounts Receivables
7
10
95%
$75,000
95%
$150,000
6
6
$4035
$8070
Emergency Orders/Month
Vendor Discounts
Numerical Exercise Solution Template
Cost Driver
Rate
Alpha
Volume
Number of Orders
Beta
Volume
Alpha
Volume
One-Year
Later
Beta
Volume
One-Year
Later
750
333
400
660
EDI Orders
$
4.5
25%
95%
95%
95%
Non-EDI Orders
$
9.01
75%
5%
5%
5%
Lines
$
0.66
15,000
10,000
11,000
20,000
Deliveries
$ 457.58
12
10
7
10
Accounts Receivable
8.64%/yr
$300,000
$75,000
$75,000
$150,000
Emergency Orders
$
25
20
10
6
6
Shipping and Handling
$
130
12
10
7
10
Product Sales/month
$150,000
$150,000
$150,000
$300,000
Cost Plus Margin
$22,500
—
—
ABP Fees
—
Total Monthly Revenue
$172,500
Less :COGS
$150,000
$150,000
$150,000
$300,000
Add: Vendor Discounts
$4,035
$4,035
$4,035
$8,070
Monthly Gross Margin
$26,535
EDI Order Costs
$844
—
NonEDI Order Costs
$5,068
Line Costs
$9,900
Shipping and Handling
$1,560
Delivery Cost
$5,491
Cost Driver
Rate
Alpha
Volume
Emergency Orders
$ 500
Interest
$2,160
Procurement
$1,486
Labeling
$1,000
Account Management
$ 991
Occupancy
$1,007
Group Fees
$ 750
Total Monthly Cost
$30,757
Net Operating Profit
$-4,222
Cost Plus/Equivalent Cost
Plus
15%
Beta
Volume
Alpha
Volume
One-Year
Later
Beta
Volume
One-Year
Later