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 had 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 below:

  

Activity Cost Pool (Activity Measure)	Total Cost		Total Activity
Customer deliveries (Number of deliveries)	$	435,000	5,000	deliveries
Manual order processing (Number of manual orders)		312,000	4,000	orders
Electronic order processing (Number of electronic orders)		338,000	13,000	orders
Line item picking (Number of line items picked)		967,500	430,000	line items
Other organization-sustaining costs (None)		650,000
Total selling and administrative expenses	$	2,702,500

  

Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $36,000 to buy from its manufacturers):

  

	Activity
Activity Measure	University	Memorial
Number of deliveries	11	29
Number of manual orders	0	46
Number of electronic orders	12	0
Number of line items picked	140	260

  

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

     

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

     

3.	Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.)

          

4.	Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $36,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)

       

Answer 1

1.Sales Revenue= cost of goods sold+Mark up (9%)

	Universal	Memorial
Cost of goods sold	$36,000	$36,000
Add: Markup(9%)	$3,240($36,000*9%)	$3,240
Total Revenue	$39,240	$39,240

2.Activity rate = Total cost/ Activity cost driver

Activity Cost Pool (Activity Measure)		Total Cost	Total Activity		Activity rate
Customer deliveries (Number of deliveries)	$	435,000	5,000	deliveries	$87 per delivery[$435,000/5,000]
Manual order processing (Number of manual orders)		312,000	4,000	orders	$78 per order [312,000/4,000]
Electronic order processing (Number of electronic orders)		338,000	13,000	orders	$26 per order[$338,000/13,000]
Line item picking (Number of line items picked)		967,500	430,000	line items	$2.25 per line item[$967,500/430,000]
Other organization-sustaining costs (None)		650,000
Total selling and administrative expenses	$	2,702,500

3 Now, we will allocate cost to universal and memorial on the basis of above OH rate

Activity Cost Pool (Activity Measure)		University	Memorial
Customer deliveries (Number of deliveries)	$87 per delivery[$435,000/5,000]	$957[$87*11]	$2,523[29*$87]
Manual order processing (Number of manual orders)	$78 per order [312,000/4,000]	0	$3,588[46*$78]
Electronic order processing (Number of electronic orders)	$26 per order[$338,000/13,000]	$312[12*$26]	0
Line item picking (Number of line items picked)	$2.25 per line item[$967,500/430,000]	$315[140*$2.25]	$585[260*$2.25]
	Total activity cost allocated	$1,584	$6,696

4.Margin

	Universal	Memorial
Sales Revenue	$39,240	$39,240	As per 1 above
Cost of goods sold	$36,000	$36,000
Gross Margin	$3,240[39,240-36,000]	$3,240
Selling and administrative expenses	$1,584	$6,696	As per 3 above
Customer margin	$1,656[3,240-1,584]	-$3,456[$3,240-6,696]

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