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 8%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies.

For years, Worley believed that the 8% 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)	$	340,000	4,000	deliveries
Manual order processing (Number of manual orders)		284,000	4,000	orders
Electronic order processing (Number of electronic orders)		266,000	14,000	orders
Line item picking (Number of line items picked)		1,175,000	470,000	line items
Other organization-sustaining costs (None)		640,000
Total selling and administrative expenses	$	2,705,000

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	12	24
Number of manual orders	0	48
Number of electronic orders	19	0
Number of line items picked	160	220

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.)

Answer 1

1
	University	Memorial
Cost of goods sold	31000	31000
Add: Markup @ 8%	2480	2480
Total Revenue	33480	33480
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	340000	4000	85.00	per delivery
Manual order processing	284000	4000	71.00	per manual order
Electronic order processing	266000	14000	19.00	per electronic order
Line item picking	1175000	470000	2.50	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	12	85.00	1020	24	85.00	2040
Manual order processing	0	71.00	0	48	71.00	3408
Electronic order processing	19	19.00	361	0	19.00	0
Line item picking	160	2.50	400	220	2.50	550
		Total	1781.00		Total	5998.00
	Total activity costs
University	1781
Memorial	5998
4
	University	Memorial
Revenue	33480	33480
Less: Costs
Cost of goods sold	31000	31000
Activity costs	1781	5998
Customer margin	699	(3518)