Managerial Accounting O&M Case Study: Financial Analysis and Solutions

This case study examines the managerial accounting challenges faced by O&M, a healthcare distributor, focusing on its pricing strategies and customer relationships. The solution analyzes the evolution of distributor roles, comparing traditional and modern responsibilities. It explores the benefits and drawbacks of activity-based pricing (ABP) versus cost-plus pricing for customers, distributors, and manufacturers. The analysis delves into the pricing matrix, cost drivers, and the inclusion of fixed and variable costs. The case study also discusses the implications of ABP on budgeting, transfer pricing, and performance evaluation, along with O&M's proposed responses to these challenges. Finally, it identifies customer types most likely to adopt ABP and the steps competitors should take before implementation. The solution provides a comprehensive overview of the financial and operational considerations in the context of the case.

Managerial Accounting
O&M Case Study
Name
Institution
1. Question One
First, distributors help manufacturers to ship large quantities of products to their customers.
Second, hospitals do not want to incur the costs associated with warehousing. Therefore,
distributors manage large materials for the customers.
1.1. Question One (a)
The roles played by distributors have changed over time. Traditionally, distributors were
required to; store and manage products on behalf of manufacturers, break bulk delivered by
manufacturers, send sales information to the manufacturers, offer credit sales to customers,
and monitor contracts and pricing. Under the new roles, distributors are required to; make
more frequent and smaller deliveries to the hospitals, offer logistic management, make
emergency supplies, offer kits to end users, and offer useful information to hospitals.
1.2. Question one (b)
The proposed Activity-based pricing will add value to both customers and manufacturers.
O&M will offer an enhanced inventory management system to the hospitals while
improving the ability of the manufacturers to cut their operating cost.

2. Question Two
Customers: Cost plus pricing allows customers to demand service quality without paying
additional costs associated with their services. The cost to manage and bulk break the inventory
to the quantities required by the customers shift to the distributors. Cost-plus pricing cause
conflict between what customers want and what distributors are willing to offer.
Distributors: Cost plus pricing forced distributors to offer low-quality services to maintain; a)
their operating cost as a manageable level and b) the relationship with customers.
Manufacturers: They could ship products/ inventories directly to the hospitals to maintain a low
price without involving the distributors.
3. Question Three
Customers are cost sensitive; they prefer a high level of service quality at low cost. On the other
hand, O&M seek to use ABP to connect its pricing strategy to the level of services provided to
the customers. The customers are expected to keep the expenditures associated with inventory
ordering at the minimum level. Therefore, customers will only make orders there is a real need
to. Customers seek a higher service level will have to pay a higher price to O&M. ABP will
help hospitals the level of services received from O&M at a lower cost in the long run.
4. Question Four
The pricing matrix comprises two cost drivers: the number of purchase orders per month and
the number of lines per purchase order. The two drivers will help O&M to determine the
activity fee associated with each customer's order.

4.1. Question Four (a)
The number of purchase order per month listed in exhibit 4 refers to the fixed costs associated
with ABP. The purchase order per month comprises of the cost items listed in total order cost
under exhibit 5. The number of lines per purchase order listed in exhibit 4 refers to the variable
costs associated with ABP. The lines per purchase order comprise of the cost items listed in
total line cost under exhibit 5.
4.2. Question Four (b)
There are some fixed and variable costs which have not been included in the activity- based
pricing (activity costs). The costs include interest costs, shipping cost, costs of handling
deliveries, account management as well as fixed costs like occupancy fee and group expenses.
O&M avoided the inclusion of all the costs for complexity reasons.
5. Question Five
 Budgeting would be costly or difficult under ABP. Currently, it is easier to predict
Ideal's budgeting activity using cost-plus pricing.
 Transfer pricing would be difficult under ABP.
 ABP does not provide a clear structure of evaluating the performance of managers at
Ideal.
 Restructuring Ideal's internal control systems would consume a lot of time, personnel
and resources.

 The adoption of ABP would come with additional costs such as the acquisition of EDI
technology.
O&M‘s responses;
 Offer hospitals the logistic support to realign their internal systems with ABP.
 Offer both ABP and its cost-plus pricing equivalent.
 Convince other distributors to support ABP by demonstrating its values to them.
6. Question Six
There are two types of customers who are more likely to adopt the ABP system. First,
customers who seek to pay only for services they consume and avoid those that they don't use.
And second, customers who seek value-oriented services.
7. Question Seven
Before either adopting or rejecting ABP, competitors of O&M will;
a) Conduct an analysis of their Activity-based costing to establish their cost drivers and the
associated rates.
b) Invest in IT and cost control systems that would not consume a lot of time and resources
to establish.