Advanced Pharmaceuticals - Profitability Analysis
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"Customer representatives are currently paid $10.00 per hour plus a commission of 1.5% of sales revenue. If these four pharmacies are indeed representative of the company's customers, could the company afford to pay its customer representatives more in order to retain them? Please explain your answer in great detail and comment on your answer. "
Please note that this problem comes from a chapter in an accounting textbook which is titled "Profitability Analysis". The chapter discusses relative and absolute profitability as well as the concept of a profitability index.
I need your answer to be detailed, in full and complete sentences, explaining step by step your analysis of the problem and HOW as well as WHY you reached your answer.
Advanced Pharmaceuticals, Inc., is a wholesale distributor of prescription drugs to independent retail and hospital-based pharmacies. Management believes that top-notch customer representatives are the key factor in determining whether the company will be successful in the future. Customer representatives serve as the company's liaison with customers-helping pharmacies monitor their stocks, delivering drugs when customer stocks run low, and providing up-to-date information on drugs from many different companies. Customer representatives must be ultra-reliable and are highly trained. Good customer representatives are hard to come by and are not easily replaced.
Customer representatives routinely record the amount of time they spend serving each pharmacy. This time includes travel time to and from the company's central warehouse as well as time spent replenishing stocks, dealing with complaints, answering questions about drugs, informing pharmacists of the latest developments and newest products, reviewing bills, explaining procedures, and so on. Some pharmacies require more hand-holding and attention than others and consequently they consume more of the representatives' time.
Recently, customer representatives have made more frequent complaints that it is impossible to do their jobs without working excessive overtime hours. This has led to an alarming increase in the number of customer representatives quitting for jobs in other organizations. As a consequence, management is considering dropping some customers to reduce the workload on customer representatives. Data concerning a representative sample of the company's customers appears below:
Leafcrest
Pharmacy
Totalrevenues $272,650
Cost of drugs sold $211,470
Customerservicecosts $10,640
Customerrepresentativetime 190
Providence
Hospital
Pharmacy
$2,948,720
$2,234,480
$74,400
1,240
Madison
Clinic
Pharmacy
$1,454,880
$1,119,440
$42,000
560
Jenkins
Pharmacy
$155,280
$115,920
$4,480
80
Customer service costs include all of the costs-other than the costs of the drugs themselvesthat could be avoided by dropping the customer. These costs include the hourly wages of the customer representatives, their sales commissions, the mileage-related costs of the customer representatives' company-provided vehicles, and so on.
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Solution Summary
Then solution explains how the company should make a decision whether to pay more to its customer representatives so as to retain them.
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The question is
"Customer representatives are currently paid $10.00 per hour plus a commission of 1.5% of sales revenue. If these four pharmacies are indeed representative of the company's customers, could the company afford to pay its customer representatives more in order to retain them?
We need to first calculate the profitability per hour of customer representative time to see if the company can afford to pay more.
The constraint is customer ...
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