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 9%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies.

For years, Worley believed that the 9% 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)	$	516,000	6,000	deliveries
Manual order processing (Number of manual orders)		420,000	6,000	orders
Electronic order processing (Number of electronic orders)		220,000	11,000	orders
Line item picking (Number of line items picked)		1,081,000	460,000	line items
Other organization-sustaining costs (None)		620,000
Total selling and administrative expenses	$	2,857,000

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 $33,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	19	22
Number of manual orders	0	47
Number of electronic orders	16	0
Number of line items picked	110	290

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 $33,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

Req 1.
Revenues
		University	Memorial
Cost of supplies		33000	33000
Add: markup @9%		2970	2970
Revenues		35970	35970
Req 2.
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Customer deliveries			Deliveries	516000	6000	86.00
Manual order processing			Order	420,000	6,000	70.00
Electronic prder processing			Orders	220,000	11,000	20.00
Line item picking			Line items	1081000	460000	2.35
Activity cost
Activity		Rate	University		Memorial
			Activity	OH	Activity	OH
Customer deliveries		86	19	1634	22	1892
Manual order processing		70	0	0	47	3290
Electronic prder processing		20	16	320	0	0
Line item picking		2.35	110	258.5	290	681.5
		Total Activity cost		2212.5		5863.5
Req 4.
Customer Margin
		University	Memorial
Revenue		35970	35970
Less: Cost of supplies		33000	33000
Less: Activity cost		2213	5863.5
Cusotmer margin		757.5	-2893.5