Question

1.(B)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 CostTotal ActivityCustomer deliveries (Number of deliveries)$567,0007,000deliveriesManual order processing (Number of manual orders) 312,0004,000ordersElectronic order processing (Number of electronic orders) 208,00013,000ordersLine item picking (Number of line items picked) 574,000410,000line itemsOther organization-sustaining costs (None) 690,000  Total selling and administrative expenses$2,351,000  

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 $32,000 to buy from manufacturers):

Activity

Activity MeasureUniversityMemorialNumber of deliveries1228Number of manual orders043Number of electronic orders170Number of line items picked110250

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 $32,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

1
	University	Memorial
Cost of goods sold	32000	32000
Add: Markup @ 8%	2560	2560
Total Revenue	34560	34560
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	567000	7000	81.00	per delivery
Manual order processing	312000	4000	78.00	per manual order
Electronic order processing	208000	13000	16.00	per electronic order
Line item picking	574000	410000	1.40	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	12	81.00	972	28	81.00	2268
Manual order processing	0	78.00	0	43	78.00	3354
Electronic order processing	17	16.00	272	0	16.00	0
Line item picking	110	1.40	154	250	1.40	350
		Total	1398.00		Total	5972.00
	Total activity costs
University	1398
Memorial	5972
4
	University	Memorial
Revenue	34560	34560
Less: Costs
Cost of goods sold	32000	32000
Activity costs	1398	5972
Customer margin	1162	-3412