Question

orley 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)	$	595,000	7,000	deliveries
Manual order processing (Number of manual orders)		462,000	6,000	orders
Electronic order processing (Number of electronic orders)		176,000	11,000	orders
Line item picking (Number of line items picked)		587,500	470,000	line items
Other organization-sustaining costs (None)		630,000
Total selling and administrative expenses	$	2,450,500

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 $35,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	16	28
Number of manual orders	0	44
Number of electronic orders	13	0
Number of line items picked	140	300

Required:

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

Total Revenue University Memorial

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

	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

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

	Total Activity Costs University Memorial

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.)

	Customer Margin University Memorial

Answer 1

1)
Total Revenue Received
	University	Memorial
Cost of goods sold to the hospital (a)	$35,000.00	$35,000.00
Markup percentage	8.00%	8.00%
Markup in dollars (b)	$2,800.00	$2,800.00
Revenue received from hospitals (a) + (b)	$37,800.00	$37,800.00
2)
Activity Cost Pool	(a) Estimated Overhead cost	(b)Expected Activity	(c) Activity Rate
Customer deliveries	$595,000.00	7000	$85.00	Per delivery
Manual order processing	$462,000.00	6000	$77.00	Per manual order
Electronic order processing	$176,000.00	11000	$16.00	Per Electronic order
Line item picking	$587,500.00	470000	$1.25	Per line item
3)					a x b	a x c
	(a) Activity Rate		University(b)	Memorial (c)	University ABC Cost	Memorial ABC Cost
Customer deliveries	$85.00	Per delivery	16	28	$1,360.00	$2,380.00
Manual order processing	$77.00	Per manual order	0	44	$0.00	$3,388.00
Electronic order processing	$16.00	Per Electronic order	13	0	$208.00	$0.00
Line item picking	$1.25	Per line item	140	300	$175.00	$375.00
Total activity Costs					$1,743.00	$6,143.00
4)
Worley’s customer margin
	University	Memorial
Sales	$37,800.00	$37,800.00
Less: Cost of Good Sold	$35,000.00	$35,000.00
Gross Margin	$2,800.00	$2,800.00
Less:
Customer deliveries	$1,360.00	$2,380.00
Manual order processing	$0.00	$3,388.00
Electronic order processing	$208.00	$0.00
Line item picking	$175.00	$375.00
Total activity Costs	$1,743.00	$6,143.00
Customer margin	$1,057.00	-$3,343.00