Reference no: EM132541136

Point 1: Sultan Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to many hospitals in Lahore. Sultan 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 Sultan that had cost Sultan Rs.100 to buy from manufacturers, Sultan would charge the hospital Rs.105 to purchase these supplies.

Point 2: For years, Sultan believed that the 5% markup covered its selling and administrative expenses and provided an adequate profit. However, in the face of declining profits, Sultan 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) . . . . . . . . . . . 500,000          5,000 deliveries

Manual order processing (Number of manual orders) . . 248,000                  4,000 orders

Electronic order processing (Number

of electronic orders) . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000                       12,500 orders

Line item picking (Number of line items picked) . . . . . . 450,000                     450,000 line items

Other organization-sustaining costs (None) . . . . . . . . . 602,000

Total selling and administrative expenses . . . . . . . . . . . Rs.2,000,000

Sultan gathered the data below for two of the many hospitals that it serves-Shaukat Khanum and Surgimed (both hospitals purchased a total quantity of medical supplies that had cost Sultan Rs.30000 to buy from its manufacturers):

Activity

Activity Measure Shaukat Khanum Surgimed

Number of deliveries . . . . . . . . . . . . . 10 25

Number of manual orders . . . . . . . . . . 0 30

Number of electronic orders . . . . . . . . 15 0

Number of line items picked . . . . . . . . 120 250

Required:

Question 1. Compute the total revenue that Sultan would receive from Shaukat Khanum and Surgimed hospitals.

Question 2. Compute Sultan's customer margin for Shaukat Khanum and Surgimed.

Question 3. Describe the purchasing behaviors that are likely to characterize Sultan's least profitable customers.