Med Max buys surgical supplies form a variety of manufacturers and then resells and delivers these supplies to hundred of hospitals.Med Max set 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 has cost Med Max $100 to buy from manufactures, Med Max would charge the hospital 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 shown below:

Activity cost pool Activity Measure Totalcost Total Activity Customer deliveries No. of deliveries 5400,000 5,000 deliveries Manual order processing No. of manual orders 300,000 4,000 orders Electronic order processing No. of electronic orders 200,000 12,500 orders Line item picking No. of line items picked 500,000 400,000 line items Total organizing sustain cost NA 500,000 Total selling and admin cost 2,000,000Activity Activity Measure City General County General Number of deliveries 10 20 Number of manual orders 0 40 Number of electronic orders 10 Number of line items pocked 100 260