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 9%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies.

For years, Worley believed that the 9% 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)	$	672,000	8,000	deliveries
Manual order processing (Number of manual orders)		365,000	5,000	orders
Electronic order processing (Number of electronic orders)		231,000	11,000	orders
Line item picking (Number of line items picked)		989,000	460,000	line items
Other organization-sustaining costs (None)		630,000
Total selling and administrative expenses	$	2,887,000

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 Measure	University	Memorial
Number of deliveries	16	23
Number of manual orders	0	41
Number of electronic orders	20	0
Number of line items picked	140	210

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

Answer - 1
All figure in doller ($).
Particulars	University	Memorial
Cost to Worley	32000	32000
Profit mark up @ 9%	2880	2880
Total revenue that Worley would receive from	34880	34880
Answer - 2
Computation of the activity rate for each activity cost pool.
Activity Cost Pool (Activity Measure)	Total Cost	Total Activity	Activity Rate per #	#
Customer deliveries (Number of deliveries)	6,72,000	8,000	84	deliveries
Manual order processing (Number of manual orders)	3,65,000	5,000	73	orders
Electronic order processing (Number of electronic orders)	2,31,000	11,000	21	orders
Line item picking (Number of line items picked)	9,89,000	4,60,000	2	line items
Other organization-sustaining costs (None) are not allocatable. Hence Consider as unallopcatable				6,30,000
Answer - 3
Computation of total activity costs that would be assigned to University and Memorial.
Particulars	Activity Rate per #	University		Memorial
		No of Activity	Total activity cost	No of Activity	Total activity cost
Customer deliveries (Number of deliveries)	84	16	1,344	23	1,932
Manual order processing (Number of manual orders)	73	0	-	41	2,993
Electronic order processing (Number of electronic orders)	21	20	420	0	-
Line item picking (Number of line items picked)	2	140	301	210	452
			2,065		5,377
Answer - 4
Computation of Worley’s customer margin for University and Memorial.
Particulars	University	Memorial
Cost to Worley	32000	32000
Cost as per activity based costing method	2,065	5,377
Cost before considering Unallocatable cost	34,065	37,377
Selling Price with 9% mark up	34880	34880
Margin	815	-2,497