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 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 Cost Total Activity Customer deliveries (Number of deliveries) $ 420,000 5,000 deliveries Manual order processing (Number of manual orders) 426,000 6,000 orders Electronic order processing (Number of electronic orders) 286,000 13,000 orders Line item picking (Number of line items picked) 902,000 410,000 line items Other organization-sustaining costs (None) 620,000 Total selling and administrative expenses $ 2,654,000 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 $40,000 to buy from manufacturers): Activity Activity Measure University Memorial Number of deliveries 19 23 Number of manual orders 0 46 Number of electronic orders 14 0 Number of line items picked 170 280 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 $40,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

Revenue:
			University	Memorial
cost of supplies			40000	40000
Add: Markup @8%			3200	3200
Revenue			43200	43200
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Customer deliveries			Delivery	420000	5000	84.00
Manual order processing			Order	426,000	6,000	71.00
Electronic order			Order	286,000	13,000	22.00
Order line picking			Line items	902,000	410,000	2.20
Oh allocated:
			University		Memorial
Activity		Rate	Activity	OH	Activity	OH
Customer deliveries		84	19	1596	23	1932
Manual order processing		71	0	0	46	3266
Electronic order		22	14	308	0	0
Order line picking		2.2	170	374	280	616
		Total Overheads		2278		5814
Customer margin:
			University	Memorial
Revenue			43200	43200
Less: Cost of supplies			40000	40000
Less: Overheads			2278	5814
Customer margin			922	-2614