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Medcare, Inc., a distributor of special pharmaceutical products, operates at capacity and has three main market segments. Bryan Hamilton, the new controller of Medcare, reported the following data for 2013:

General

Supermarket Drugstore Mom-and-Pop

Chains Chains Single Store Medcare

Revenues $3,720,000 $3,155,000 $1,992,000 $8,867,000

Cost of goods sold 3,610,000 2,995,000 1,802,000 8,407,000

Gross margin $110,000 $160,000 $190,000 460,000

Other operating costs 331,070

Operating income $128,930

For many years, Medcare has used gross margin percentage to evaluate the relative profitability of its market segments. However, Hamilton recently attended a seminar on activity-based costing and is considering using it at Medcare to analyze and allocate "other operating costs."He meets with all the key managers and several of his operations and sales staff and they agree that there are five key activities that drive other operating costs at Medcare:

Activity Area	Cost Driver
Order processing	Number of customer purchase 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. Medcare's staff stacks cartons directly onto display shelves in customers' stores. Currently, there is no additional charge to the customer for shelf-stocking and not all customers use Medcare for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2013 is as follows;

Activity-Based Cost Data Activity Level

Medcare, Inc., 2013 General Drugstore Mom-and-Pop Total cost of

Supermarket Chains Single Stores activity 2013

Orders processed (number) 150 370 1,480 $82,000

Line-items ordered (number) 1,850 4,200 16,200 89,000

Store deliveries made (number) 150 250 1,040 76,320

Cartons shipped to stores (number)37,000 27,000 10,000 74,000

Shelf stocking (hours) 375 185 90 9,750 $331,070

Required

1.	Compute the 2013 gross-margin percentage for each of Medcare's three market segments.
2.	Compute the cost driver rates for each of the five activity areas.
3.	Use the activity-based costing information to allocate the $331,070 of "other operating costs" to each of the market segments. Compute the operating income for each market segment.
4.	Comment on the results. What new insights are available with the activity-based costing information?

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