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Managerial Accounting Discussion Questions: Owens & Minor

1. What are the services rendered by the distributor to manufacturers and hospitals? 2. How has the competitive environment at O&M changed over time? 3. Explain Exhibit 5. How does the pricing matrix work? How do the costs in exhibit 5 correspond to the costs shown in the customer profitability statement in Exhibit 4? 4. Numerical Exercise 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 customerlevel costs. See Alpha Hospital – Customer Profitability Statement (Exhibit 4). Draft a customer profitability statement for Beta Hospital using the format shown in Exhibit 4.

Activity Rates EDI Order Cost Non-EDI Order Cost Line Cost Delivery Cost Interest Cost Emergency Delivery Cost Shipping and Handling Cost

$ 4.50 per EDI order 9.01 per non-EDI order 0.66 per line 457.58 per delivery 0.09 per annum 25.00 per emergency order 130.00 per delivery

Stabilized Costs Procurement Labeling Account Management Occupancy Group Fees

$1,486 1,000 991 1,007 750

Activity Levels Sales per month Orders per month Lines per month Deliveries per month % EDI Orders Days Sales Outstanding Emergency Orders per month Cost-Plus %

Alpha Hospital $150,000 750 15,000 12 25% 60 20 15%

Beta Hospital $150,000 333 10,000 5 95% 15 5 15%

b. It is one year later. Both of your customers 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 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.

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