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 10%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $110 to purchase these supplies.

For years, Worley believed that the 10% 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)	$	616,000	7,000	deliveries
Manual order processing (Number of manual orders)		365,000	5,000	orders
Electronic order processing (Number of electronic orders)		364,000	14,000	orders
Line item picking (Number of line items picked)		875,000	500,000	line items
Other organization-sustaining costs (None)		660,000
Total selling and administrative expenses	$	2,880,000

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 $39,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	10	20
Number of manual orders	0	45
Number of electronic orders	15	0
Number of line items picked	130	200

Required:

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

2. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $39,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

Req 1.
Revenues
		University	Memorial
Cost of supplies		39000	39000
Add: markup @10%		3900	3900
Revenues		42900	42900
Req 2.
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Customer deliveries			Deliveries	616000	7000	88.00
Manual order processing			Order	365,000	5,000	73.00
Electronic prder processing			Orders	364,000	14,000	26.00
Line item picking			Line items	875000	500000	1.75
Activity cost
Activity		Rate	University		Memorial
			Activity	OH	Activity	OH
Customer deliveries		88	10	880	20	1760
Manual order processing		73	0	0	45	3285
Electronic prder processing		26	15	390	0	0
Line item picking		1.75	130	227.5	200	350
		Total Activity cost		1497.5		5395
Req 4.
Customer Margin
		University	Memorial
Revenue		42900	42900
Less: Cost of supplies		39000	39000
Less: Activity cost		1498	5395
Customer margin		2403	-1495