Med Max distributes medical supplies to doctors’ offices and clinics throughout Alberta. Med Max sets its prices by marking up its cost of goods sold by 5%. For example, if Med Max paid $100 to buy supplies from manufacturers, Med Max would charge its customers $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 ABC system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities, as shown below:
Med Max gathered the data below for two of the many clinics that it serves—City Clinic and
County Clinic (both clinics purchased a total quantity of medical supplies that had cost Med
Max $30,000 to buy from its manufacturers):
1. Compute the total revenue that Med Max would receive from City Clinic and County Clinic.
2. Compute the activity rate for each activity cost pool.
3. Compute the total activity costs that would be assigned to City Clinic and County Clinic.
4. Compute Med Max’s customer margin for City Clinic and County Clinic. ( Hint: Do not overlook the $30,000 cost of goods sold that Med Max incurred serving each clinic.)
5. Describe the purchasing behaviours that are likely to characterize Med Max’s least profitable customers.

  • CreatedJuly 08, 2015
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