Question

You are an account manager at Owens & Minor, a distributor of hospital supplies. You have two customers, Alpha Hospital and Beta Hospital. Your value proposition is to provide each customer with high-quality hospital supplies at the time, in the order quantity, and through the sales channel (online orders or through salespeople) desired by the hospital. Below are your company’s direct product cost and activity rates, and each customer’s activity levels.

Direct (Traceable) Cost per unit sold	$3.46/unit
“Other” Cost Pool (organization-sustaining overhead & cost of excess capacity)	$200,000 per year
Activity Overhead Rates
Manufacturing overhead Cost	$1.54/unit sold
Online Order Cost	$5.00/online order
Salespeople Order Cost	$10.00/salesperson order
Emergency Order Cost Premium	$70/emergency order
Delivery overhead Cost	$500/delivery

Activity Levels	Alpha Hospital	Beta Hospital
Units of product ordered/year	15,000 units	10,000 units
Total Orders/year	1200 orders	300 orders
Emergency Orders (included in the total above)/year	150 emergency orders	30 emergency orders
% of orders that are placed online	25% of total orders	80% of total orders
% of orders that are placed with salespeople	75% of total orders	20% of total orders
Deliveries/year	12 deliveries	15 deliveries

Problem 2 – Assume that your company, Owens & Minor, currently charges a $8.00 selling price per unit to each of its customers. Create a customer profitability statement for each customer. Calculate profitability in both total dollar and per-unit terms.

Hint: Subtract both the direct (traceable) costs and the activity-based allocated overhead costs from the sales revenue generated by each customer. Here is a template if you wish to use it:

		Alpha Hospital		Beta Hospital
		Total	Per Unit Sold	Total	Per Unit Sold
Units Sold
Revenue or Selling Price
Direct Cost
	Activity Rates
Manufacturing Overhead Activity
Online Order Activity
Salesperson Order Activity
Emergency Order Activity
Delivery Activity
Product Cost
Product Margin
Product Margin %

Answer 1

Total Beta Hospital Total Per Unit Per Unit Sold Sold Units Sold 15,000 10,000 Revenue or Selling Price | $ 1,20,000.00 $ 8.00$ 80,000.00 $ 8.00 Direct Cost | $ 51,900.00 $ 3.46 $ 34,600.00 $ 3.46 Activity Number of Number of Rates activity activity Manufacturing Overhead $ 1.54 $ 23,100.00 15,000 $ 15,400.00 10,000 Activity Online Order Activity $ 5.00 $ 1.500.00 300 $ 1.200.00 240 Salesperson Order Activity $ 10.00 $ 9,000.00 900 $ 600.00 Emergency Order Activity $ 70.00 $ 10,500.00 150 $ 2,100.00 Delivery Activity $ 500.00 S 6,000.00 12 $ 7,500.00 Product Cost $ 1,02,000.00 $ 6.80 $ 61,400.00 $ 6.14 $ $ $ 18,600.00 $ Product Margin Product Margin % 18,000.00 15% 1.20 15% 23% 1.86 23% 2