Question

Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley 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 Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $105 to purchase these supplies.

For years, Worley believed that the 5% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits, Worley 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:

Activity Cost Pool (Activity Measure)	Total Cost		Total Activity
Customer deliveries (Number of deliveries)	$	264,000	3,000	deliveries
Manual order processing (Number of manual orders)		600,000	8,000	orders
Electronic order processing (Number of electronic orders)		322,000	14,000	orders
Line item picking (Number of line items picked)		696,000	480,000	line items
Other organization-sustaining costs (None)		630,000
Total selling and administrative expenses	$	2,512,000

Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (each hospital purchased medical supplies that had cost Worley $31,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	11	23
Number of manual orders	0	40
Number of electronic orders	13	0
Number of line items picked	200	250

Required:

1. Compute the total revenue that Worley would receive from University and Memorial.

2. Compute the activity rate for each activity cost pool.

3. Compute the total activity costs that would be assigned to University and Memorial.

4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $31,000 cost of goods sold that Worley incurred serving each hospital.)

Compute the total revenue that Worley would receive from University and Memorial.

Required1

	Total Revenue University Memorial

Required2

Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.)

	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

Compute the total activity costs that would be assigned to University and Memorial.

Required3

	Total Activity Costs University Memorial

Required4

Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $31,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amounts should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number.)

	Customer Margin University Memorial

Answer 1

1
	University	Memorial
Cost of goods sold	31000	31000
Add: Markup @ 5%	1550	1550
Total Revenue	32550	32550
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	264000	3000	88.00	per delivery
Manual order processing	600000	8000	75.00	per manual order
Electronic order processing	322000	14000	23.00	per electronic order
Line item picking	696000	480000	1.45	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	11	88.00	968	23	88.00	2024
Manual order processing	0	75.00	0	40	75.00	3000
Electronic order processing	13	23.00	299	0	23.00	0
Line item picking	200	1.45	290	250	1.45	362.5
		Total	1557.00		Total	5386.5
	Total activity costs
University	1557.00
Memorial	5386.50
4
	University	Memorial
Revenue	32550	32550
Less: Costs
Cost of goods sold	31000	31000
Activity costs	1557.00	5386.50
Customer margin	-7	-3837
	Customer margin
University	-7
Memorial	-3837
Note: Customer margin for Memorial is $3836.50. So it can be alternatively rounded off to $3836