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 had 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 below:

  

Activity Cost Pool (Activity Measure)	Total Cost		Total Activity
Customer deliveries (Number of deliveries)	$	574,000	7,000	deliveries
Manual order processing (Number of manual orders)		490,000	7,000	orders
Electronic order processing (Number of electronic orders)		308,000	14,000	orders
Line item picking (Number of line items picked)		1,057,500	470,000	line items
Other organization-sustaining costs (None)		610,000
Total selling and administrative expenses	$	3,039,500

  

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 $37,000 to buy from its manufacturers):

  

	Activity
Activity Measure	University	Memorial
Number of deliveries	12	27
Number of manual orders	0	42
Number of electronic orders	12	0
Number of line items picked	160	300

  

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 $37,000 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

		University	Memorial
1)	Cost of goods sold to hospital	37,000	37000
	Markup percentage	8%	8%
	mark up in amount	2,960	2960
	Total revenue	39,960	39960
2)	Activity Cost Pool	Estimated Overhead cost	Estimated Activity(Total)	Activity rate
	Customer deliveries	574,000	7,000	82.00	per deliveries
	manual order processing	490,000	7,000	70.00	per order
	Electronic order processing	308,000	14,000	22.00	per order
	line item packing	1,057,500	470,000	2.25	per line item
	Total	2,429,500
3)		Activity rate	University(Cost Driver)	University (MOH Allocation)	memorial (Cost Driver)	Memorial (MOH Allocation)
	Customer deliveries	82.00	12	984.00	27	2,214.0
	manual order processing	70.00	-	-	42	2,940.0
	Electronic order processing	22.00	12	264.00	-	-
	line item packing	2.25	60	135.00	300	675.0
	Total activity cost			1,383.00		5,829.0
4)		Univesity	Memorial
	Sales Revenue	39,960.00	39,960.00
	Less: Cost of goods sold	(37,000.00)	(37,000.00)
	Less: Overhead allocated	(1,383.00)	(5,829.0)
	net customer margin	1,577.00	(2,869.00)