Scribd
Upload
239 views

Numerical Example

The document provides activity and cost data for two hospital customers, Alpha and Beta, of an medical supply company. It asks to 1) draft a profitability statement for Beta using the format of Alpha's statement, and 2) draft new profitability statements for both hospitals after switching to activity-based pricing, calculating the equivalent cost-plus percentages.

Uploaded by

Vishal Goyal
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
239 views

Numerical Example

The document provides activity and cost data for two hospital customers, Alpha and Beta, of an medical supply company. It asks to 1) draft a profitability statement for Beta using the format of Alpha's statement, and 2) draft new profitability statements for both hospitals after switching to activity-based pricing, calculating the equivalent cost-plus percentages.

Uploaded by

Vishal Goyal
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 2

A. You are an account manager at O&M.

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 (A) case). Draft a profitability statement for Beta Hospital using the format shown
in Exhibit 4.

Activity Rates
EDI order cost $4.50 / EDI order
Non-EDI order cost $ 9.01 / Non-EDI order
Line Cost $0.66 / Line
Delivery Cost $457.58 / Delivery
Interest Cost 8.64% per annum
Emergency Order Cost $25 / Emergency order
Shipping and Handling Cost $130 / Delivery

Customer Level Costs


Procurement $ 1486
Labeling $ 1000
Account Management $ 991
Occupancy $ 1007
Group Fees $ 750

Activity Levels Alpha Hospital Beta Hospital

Sales/Month $ 150,000 $ 150,000


Orders/Month 750 333
Lines/Month 15,000 10,000
Deliveries/Month 12 10
% EDI Orders 25% 95%
Accounts Receivable $ 300,000 $ 75,000
Emergency Orders/Month 20 10
Vendor Discounts $ 4,035 $ 4,035
Cost-Plus% 15% 15%
B. It is one year later. Both your customers have switched to activity-based pricing 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 and Beta Hospitals 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.

Activity Levels Alpha Hospital Beta Hospital

Sales/Month $ 150,000 $ 300,000


Orders/Month 400 660
Lines/Month 11,000 20,000
Deliveries/Month 7 10
% EDI Orders 95% 95%
Accounts Receivable $ 75,000 $ 150,000
Emergency Orders/Month 6 6
Vendor Discounts $ 4,035 $ 8,070
(Equivalent) Cost-Plus% ? ?

You might also like