- Discuss briefly, the problems with cost-plus pricing in Owens and Minor/
- Briefly explain Exhibit 5. How does the pricing matrix work? How do costs in Exhibit 5 correspond to the costs shown in the customer profitability statement in Exhibit 4?
- Numerical exercise
(a) You are an account manager at Owens & Minor. 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, Inc. A). Draft a customer profitability statement for Beta Hospital using the format shown in Exhibit 4.
Activity Rates Stabilized Costs
EDI Order Cost $4.50 / edi order Procurement $1,486
Non-EDI Order Cost $9.01 / non-edi order Labeling $1,000
Line Cost $0.66 / line Account Management $991
Delivery Cost $457.58 / delivery Occupancy $1,007
Interest Cost 8.64% per annum Group Fees $750
Emergency Delivery Cost $25.00 / emergency order
Shipping and Handling Cost $130.00 / delivery
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 5
% EDI Orders 25% 95%
Days Sales Outstanding 60 15
Emergency Orders / Month 20 5
Cost-Plus % 15% 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.
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%
Days Sales Outstanding 15 15
Emergency Orders / Month 6 6
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