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Med Max - activity based costing

Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Med Max sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 5%. For example, if a hospital buys supplies from Med Max that had cost Med Max $100 to buy from manufacturers, Med Max would charge the hospital $105 to purchase these supplies.
For years, Med Max believed that the 5% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Med Max decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below:

Activity Cost Pool Activity Measure Total Cost Total Activity
Customer deliveries Number of deliveries $ 400,000 5,000 deliveries
Manual order processing Number of manual orders 300,000 4,000 orders
Electronic order processing Number of electronic orders 200,000 12,500 orders
Line item picking Number of line items picked 500,000 400,000 line items
Other organization-sustaining costs NA 600,000
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Total selling and administrative expenses $ 2,000,000
________________________________________________________________________________ ________________________________________________________________________________
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Med Max gathered the data below for two of the many hospitals that it serves?City General and County General (each hospital purchased medical supplies that had cost Med Max $30,000 to buy from its manufacturers):

Activity
Activity Measure City General County General
Number of deliveries 10 20
Number of manual orders 0 40
Number of electronic orders 10 0
Number of line items picked 100 260
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Required:
1. Compute the total revenue that Med Max would receive from City General and County General. (Omit the "$" sign in your response.)

Total Revenue
City General $

County General $

________________________________________

2. Compute the activity rate for each activity cost pool. (Round the "Line item picking" to 2 decimal places. Omit the "$" sign in your response.)

Activity Cost Pool Activity Rate
Customer deliveries $
per delivery
Manual order processing $
per manual order
Electronic order processing $
per electronic order
Line item picking $
per line item picked
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3. Compute the total activity costs that would be assigned to City General and County General. (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Total Activity Costs
City General $

County General $

________________________________________

4. Compute Med Max's customer margin for City General and County General. (Hint: Do not overlook the $30,000 cost of goods sold that Med Max incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Customer Margin
City General $

County General $

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Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Med Max sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 5%. For example, if a hospital buys supplies from Med Max that had cost Med Max $100 to buy from manufacturers, Med Max would charge the hospital $105 to purchase these supplies.
For years, Med Max believed that the 5% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Med Max decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below:

Activity Cost Pool Activity Measure Total Cost Total Activity
Customer deliveries Number of ...

Solution Summary

Med Max activity based costing is examined.

$2.19