Question

Company B sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 6%. For years, Company B believed that the 6% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits, Company B 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)	$	528,000	6,000	deliveries
Manual order processing (Number of manual orders)		432,000	6,000	orders
Electronic order processing (Number of electronic orders)		231,000	11,000	orders
Line item picking (Number of line items picked)		864,000	480,000	line items
Other organization-sustaining costs (None)		690,000
Total selling and administrative expenses	$	2,745,000

Company B gathered the data below for two of the many hospitals that it serves—University and Memorial (each hospital purchased medical supplies that had cost Company B $30,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	13	26
Number of manual orders	0	50
Number of electronic orders	19	0
Number of line items picked	160	280

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

2. Compute the activity rate for each activity cost pool. (customer deliveries, manual order processing, electronic order processing, line item picking)

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

4. Compute Company B's customer margin for University and for Memorial. (Hint: Do not overlook the $30,000 cost of goods sold that Company B incurred serving each hospital.)

Answer 1

		University	Memorial
1)	Cost of goods sold to hospital	30,000	30000
	Markup percentage	6%	6%
	mark up in amount	1,800	1800
	Total revenue	31,800	31800
2)	Activity Cost Pool	Estimated Overhead cost	Estimated Activity(Total)	Activity rate
	Customer deliveries	528,000	6,000	88.00	per deliveries
	manual order processing	432,000	6,000	72.00	per order
	Electronic order processing	231,000	11,000	21.00	per order
	line item packing	864,000	480,000	1.80	per line item
	Total	2,055,000
3)		Activity rate	University(Cost Driver)	University (MOH Allocation)	memorial (Cost Driver)	Memorial (MOH Allocation)
	Customer deliveries	88.00	13	1,144.00	26	2,288.0
	manual order processing	72.00	-	-	50	3,600.0
	Electronic order processing	21.00	19	399.00	-	-
	line item packing	1.80	160	288.00	280	504.0
	Total activity cost			1,831.00		6,392.0
4)		Univesity	Memorial
	Sales Revenue	31,800.00	31,800.00
	Less: Cost of goods sold	(30,000.00)	(30,000.00)
	Less: Overhead allocated	(1,831.00)	(6,392.0)
	net customer margin	(31.00)	(4,592.00)