Required: 1. Using the first-stage allocation from Exercise 7-7 and the above data, compute the activity 2. rates for the activity-based costing system. (Use Exhibit 7-6 as a guide.) Round all computa- tions to the nearest whole cent. What do these results suggest to you concerning operations at the Avon branch? EXERCISE 7-9 Customer Profitability Analysis [L03, L04, L05] 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 cus- tomer profitability. The company broke its selling and administrative expenses into five activities as shown below: Activity Cost Pool Customer deliveries . . . Manual order processing Electronic order processing Line item picking..... Other organization-sustaining costs Total selling and administrative expenses Activity Measure Number of deliveries Number of manual orders Total Cost Total Activity $ 400,000 300,000 5,000 deliveries 4,000 orders Number of electronic orders 200,000 12,500 orders Number of line items picked NA 500,000 400,000 line items 600,000 $2,000,000 Med Max gathered the data below for two of the many hospitals that it serves-City General and County General (both hospitals purchased a total quantity of medical supplies that had cost Med Max $30,000 to buy from its manufacturers): Activity City General County General Activity Measure Number of deliveries... Number of manual orders Number of electronic orders. Number of line items picked. 100 10 24080 Required: 1. Compute the total revenue that Med Max would receive from City General and County General. 2. Compute the activity rate for each activity cost pool. 3. Compute the total activity costs that would be assigned to City General and 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.) 5. Describe the purchasing behaviors that are likely to characterize Med Max's least profitable customers.