REDDEN CORPORATION
The REDDEN CORPORATION, a distributor of special pharmaceutical products, operates at capacity and has three main market segments:
General supermarket chains
Drugstore chains
Mom and Pop single store pharmacies
REDDEN reported the following data for 2017:
General Supermarket Chains
Drugstore Chains
Mom and Pop Single Stores
Total
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 operating costs
301,080
Operating Income
$136,920
For many years, REDDEN has used gross margin percentages to evaluate the relative profitability of its market segments. But REDDEN recently attended a seminar on ABC and is considering using at REDDEN to analyze and allocate âother operating costs.â REDDEN meets with all the key managers and several of the operations and sales staff, and they agree that there are five key activities that drive other operating costs at REDDEN:
Activity Area Cost Driver
Order processing Number of customer purchasing 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. REDDENâs staff stacks cartons directly onto display shelves in customersâ stores. Currently, there is no additional charge to the customer for shelf stocking, and not all customers use REDDEN for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2017 is shown below:
Activity
General Supermarket Chains
Drugstore Chains
Mom and Pop Single Stores
Total Cost of Activity in 2017
Orders processed
140
360
1,500
$80,000
Line items ordered
1,960
4,320
15,000
$63,840
Store deliveries made
120
360
1,000
$71,000
Cartons shipped to stores
36,000
24,000
16,000
$76,000
Shelf stocking (hours)
360
180
100
$10,240
$301,080
REQUIRED:
Compute the 2017 gross margin percentage for each of REDDENâs three market segments.
Compute the cost driver rates for each of the five activity areas within the âother operating costs.â
Use ABC information to allocate the $301,080 of âother operating costsâ to each of the market segments. Compute the operating income for each market segment.
Comment on the results. What new insights are available with the ABC information?
REDDEN CORPORATION
The REDDEN CORPORATION, a distributor of special pharmaceutical products, operates at capacity and has three main market segments:
General supermarket chains
Drugstore chains
Mom and Pop single store pharmacies
REDDEN reported the following data for 2017:
| General Supermarket Chains | Drugstore Chains | Mom and Pop Single Stores | Total | |
| 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 operating costs | 301,080 | |||
| Operating Income | $136,920 |
For many years, REDDEN has used gross margin percentages to evaluate the relative profitability of its market segments. But REDDEN recently attended a seminar on ABC and is considering using at REDDEN to analyze and allocate âother operating costs.â REDDEN meets with all the key managers and several of the operations and sales staff, and they agree that there are five key activities that drive other operating costs at REDDEN:
Activity Area Cost Driver
Order processing Number of customer purchasing 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. REDDENâs staff stacks cartons directly onto display shelves in customersâ stores. Currently, there is no additional charge to the customer for shelf stocking, and not all customers use REDDEN for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2017 is shown below:
| Activity | General Supermarket Chains | Drugstore Chains | Mom and Pop Single Stores | Total Cost of Activity in 2017 |
| Orders processed | 140 | 360 | 1,500 | $80,000 |
| Line items ordered | 1,960 | 4,320 | 15,000 | $63,840 |
| Store deliveries made | 120 | 360 | 1,000 | $71,000 |
| Cartons shipped to stores | 36,000 | 24,000 | 16,000 | $76,000 |
| Shelf stocking (hours) | 360 | 180 | 100 | $10,240 |
| $301,080 |
REQUIRED:
Compute the 2017 gross margin percentage for each of REDDENâs three market segments.
Compute the cost driver rates for each of the five activity areas within the âother operating costs.â
Use ABC information to allocate the $301,080 of âother operating costsâ to each of the market segments. Compute the operating income for each market segment.
Comment on the results. What new insights are available with the ABC information?
