L4

Sales:
- Total Sales: $1,500,000$ (100.0%)
Cost of Goods Sold (COGS):
- Total COGS: $1,150,000$ (76.7%)
- Gross Margin:
- Gross Margin Amount: $350,000$ (23.3%)

Total Operating Expenses: $321,500$ (21.4%)
- Salaries and Benefits: $225,000$ (15.0%)
- Rent: $12,000$ (0.8%)
- Utilities: $10,000$ (0.7%)
- Professional Fees: $9,000$ (0.6%)
- Taxes and Licenses: $2,500$ (0.2%)
- Insurance: $10,500$ (0.7%)
- Interest: $11,000$ (0.7%)
- Computer Expenses: $9,500$ (0.6%)
- Depreciation: $19,000$ (1.3%)
- Marketing: $1,000$ (0.1%)
- Miscellaneous: $12,000$ (0.8%)
Net Income Before Taxes:
- Net Income: $28,500$ (1.9%)

Gross Margin % Calculation:
- Formula: ext{GM ext{%}} = rac{ ext{Sales} - ext{COGS}}{ ext{Sales}} imes 100 ext{%}
- Explanation: This measure reflects the firm’s profitability before considering expenses. High gross margins are positive but may come at the expense of potential sales.
- Scenario Examples:
- Scenario 1:
  - Cost = $5$ , Price = $10$ , Units Sold = $10$
  - Gross Margin % = rac{(10 - 5) imes 10}{10 imes 10} imes 100 = 50 ext{%}
  - Gross Profit = $50$
- Scenario 2:
  - Cost = $5$ , Price = $8$ , Units Sold = $20$
  - Gross Margin % = rac{(8 - 5) imes 20}{20 imes 8} imes 100 = 30 ext{%}
  - Gross Profit = $60$

Sales Analysis:
- Scenario 1:
- Sales: $2,000,000$ , COGS: $-1,425,600$
- Gross Margin: $574,400$ , Expenses: $-452,000$
- Net Income: $122,400$
- Scenario 2:
- Sales: $2,000,000$ , COGS = $-1,440,000$ , Gross Margin: $560,000$ ,
- Net Income: $108,000$
- Key Insight: A decrease in COGS by 1% increased profits by 13%.

Overall Gross Margins by Company:
- CVS Health: 25.9% (Prescriptions: 77%)
- Rite Aid: 24.9% (Prescriptions: 70%)
- Walgreens Boots Alliance: 21.7% (Prescriptions: 74%)
- Independent Pharmacies: 23.3% (Prescriptions: 93%)
- Source: Drug Channels Institute analysis of company reports and NCPA Digest.

Gross Profit per Prescription Dispensed:
- 2017: $11.60$
- 2018: $11.53$
- 2019: $11.78$
- 2020: $12.56$
- 2021: $11.64$
Gross Margin per Prescription Dispensed:
- 2017: 21.0%
- 2018: 20.9%
- 2019: 21.1%
- 2020: 20.8%
- 2021: 20.7%
- Source: Drug Channels Institute analysis of NCPA digest data.

Potential Reasons for Low Gross Margin (< Median):
- Membership in buying groups and potential underutilization of benefits
- Not taking full advantage of discounts (cash, volume, prompt payment, etc.)
- Pricing might be outdated
- Signing undesirable third-party contracts
- Excessive shrinkage due to theft, obsolescence, breakage, etc.

Net Income % Calculation:
- Formula: ext{Net Income ext{%}} = rac{ ext{Net Income}}{ ext{Sales}} imes 100 ext{%}
- Explanation: This ratio shows net profit margin after considering all expenses. When used with GM%, it indicates how well the manager controls operating expenses.
Low Net Income Considerations:
- Check Gross Margin % and operating expenses through cost-of-dispensing analysis targeting high expenses.

Survey Overview:
- Total Surveys: 66,000
- Response Rate: 24%
- Mean Overall Cost of Dispensing per Prescription:
- Mean: $12.40$
- Median: $11.15$
Major Cost Drivers:
- Payroll costs account for approximately 58% of total costs of dispensing, i.e., $7.22$ out of $12.40$ .

ROE Formula:
- ext{Return on Equity ext{%}} = rac{ ext{Net Income}}{ ext{Owner's Equity}} imes 100 ext{%}
- Explanation: Measures profit earned per dollar of invested capital and allows investors to compare with alternative investment returns.
Low ROE Action Points:
- Review Net Income % for improvement opportunities.
- Assess capital investment, possibly shifting surplus capital to higher-yield investments or reducing own capital in favor of borrowed funds.

ROA Formula:
- ext{Return on Assets ext{%}} = rac{ ext{Net Income}}{ ext{Total Assets}} imes 100 ext{%}
- Explanation: Evaluates the effectiveness of all available funds to generate profits, considered superior to ROE by some.
Low ROA Considerations:
- Review Net Income % for possible improvement.
- Analyze Current Ratio, Inventory Turnover, and Accounts Receivable Collection Period for control over assets.

Conventional Profit Measures:
- Indicate past success but are ineffective for projecting future profits.
Break-even Analysis Benefits:
- Enhances decision-making by illustrating profit/cost relationships across varying sales volumes and conditions.

Fixed Costs:
- Remain unchanged over significant sales ranges (e.g., salaries, utilities, insurance, depreciation).
Variable Costs:
- Vary in direct proportion to sales volumes (e.g., COGS, supplies like vials and labels).

Break-even Point (BEP):
- The sales volume where total revenues equal total costs; leads to neither profit nor loss.
- Calculable in dollars or units for single product firms (e.g., a pharmacy's prescription department).
- Multiple product firms must calculate BEP on total revenues and costs together.

Break-even Graph for Surrywood Pharmacy:
- Sales = $892,000$
- BEP = $744,000$
Profit and Loss Estimation Graph:
- Loss @ sales $600,000$ is $40,000$ .
Prescription Department Break-even Graph:
- Orders analyzed based on prescriptions dispensed over time.

Contribution Margin Definition:
- Contribution Margin = Revenue - Variable Costs
- Represents revenue exceeding variable costs that contributes to fixed costs and net income.
Example Calculation:
- Contribution Margin = $248,700$
- Net Income = $41,400$

Depreciation Definition:
- The accounting process to recognize the loss in value of a fixed asset over time.
Components for Calculation:
- Acquisition Cost (C), Useful Life (N), Residual Value (R).

Straight-Line Method Equation:
- $D = rac{(C - R)}{N}$
- Example Calculation: For a cholesterol testing device costing $1,995$ with a useful life of 5 years and residual value of $100$ ,
- Annual Depreciation Expense: $D = rac{(1995 - 100)}{5} = 379$