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) $ 595,000 7,000 deliveries Manual order processing (Number of manual orders) 568,000 8,000 orders Electronic order processing (Number of electronic orders) 336,000 14,000 orders Line item picking (Number of line items picked) 782,000 460,000 line items Other organization-sustaining costs (None) 630,000 Total selling and administrative expenses $ 2,911,000 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 17 28 Number of manual orders 0 44 Number of electronic orders 18 0 Number of line items picked 180 290 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.)

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

	Total Revenue University Memorial

ompute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.)

	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

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

	Total Activity Costs University Memorial

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.) (Loss amounts should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number.)

	Customer Margin University Memorial

• Required 3

Answer 1

	University	Memorial
Total Revenue	33,790	33,790
2.Activity Rate = Overhead Cost/Total Activity
Customer Deliveries	85
Manual Order Processing	71
Electronic Order Processing	24
Line item picking	1.7
Cost Assigned = Activity Rate*Activity Driver
	University	Memorial
Customer Deliveries	1445	2,380
Manual Order Processing	0	3,124
Electronic Order Processing	432	0
Line item picking	306	493
Total cost	2,183	5,997
Customer Margin = Revenue - Cost
	University	Memorial
Customer Margin	607	-3,207