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 6%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $106 to purchase these supplies. For years, Worley believed that the 6% 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 below: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 348,000 4,000 deliveries Manual order processing (Number of manual orders) 380,000 5,000 orders Electronic order processing (Number of electronic orders) 252,000 14,000 orders Line item picking (Number of line items picked) 742,500 450,000 line items Other organization-sustaining costs (None) 630,000 Total selling and administrative expenses $ 2,352,500 Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $35,000 to buy from its manufacturers): Activity Activity Measure University Memorial Number of deliveries 19 29 Number of manual orders 0 41 Number of electronic orders 16 0 Number of line items picked 180 230 Required: 1. Compute the total revenue that Worley would receive from University and Memorial. 2. Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) 3. Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.) 4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $35,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

1
	University	Memorial
Cost of goods sold	35000	35000
Add: Markup @ 6%	2100	2100
Total Revenue	37100	37100
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	348000	4000	87.00	per delivery
Manual order processing	380000	5000	76.00	per manual order
Electronic order processing	252000	14000	18.00	per electronic order
Line item picking	742500	450000	1.65	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	19	87.00	1653	29	87.00	2523
Manual order processing	0	76.00	0	41	76.00	3116
Electronic order processing	16	18.00	288	0	18.00	0
Line item picking	180	1.65	297	230	1.65	380
		Total	2238.00		Total	6018.50
	Total activity costs
University	2238.00
Memorial	6018.50
4
	University	Memorial
Revenue	37100	37100
Less: Costs
Cost of goods sold	35000	35000
Activity costs	2238.00	6018.50
Customer margin	(138.00)	(3918.50)