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 10%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $110 to purchase these supplies.

For years, Worley believed that the 10% 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)	$	696,000	8,000	deliveries
Manual order processing (Number of manual orders)		666,000	9,000	orders
Electronic order processing (Number of electronic orders)		160,000	10,000	orders
Line item picking (Number of line items picked)		967,500	450,000	line items
Other organization-sustaining costs (None)		670,000
Total selling and administrative expenses	$	3,159,500

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 $38,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	15	20
Number of manual orders	0	49
Number of electronic orders	17	0
Number of line items picked	120	240

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 $38,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

	University	Memorial
Total Revenue	41,800	41,800
2.Activity Rate = Overhead Cost/Total Activity
Customer Deliveries	87
Manual Order Processing	74
Electronic Order Processing	16
Line item picking	2.15
Cost Assigned = Activity Rate*Activity Driver
	University	Memorial
Customer Deliveries	1305	1,740
Manual Order Processing	0	3,626
Electronic Order Processing	272	0
Line item picking	258	516
Total cost	1,835	5,882
Customer Margin = Revenue - Cost
	University	Memorial
Customer Margin	1,965	-2,082