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 7%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $107 to purchase these supplies.

For years, Worley believed that the 7% 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)	$	574,000	7,000	deliveries
Manual order processing (Number of manual orders)		518,000	7,000	orders
Electronic order processing (Number of electronic orders)		220,000	10,000	orders
Line item picking (Number of line items picked)		920,000	400,000	line items
Other organization-sustaining costs (None)		620,000
Total selling and administrative expenses	$	2,852,000

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 $39,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	19	28
Number of manual orders	0	42
Number of electronic orders	14	0
Number of line items picked	170	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.

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 $39,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

1
	University	Memorial
Cost of goods sold	39000	39000
Add: Markup @ 7%	2730	2730
Total Revenue	41730	41730
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	574000	7000	82.00	per delivery
Manual order processing	518000	7000	74.00	per manual order
Electronic order processing	220000	10000	22.00	per electronic order
Line item picking	920000	400000	2.30	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	19	82.00	1558	28	82.00	2296
Manual order processing	0	74.00	0	42	74.00	3108
Electronic order processing	14	22.00	308	0	22.00	0
Line item picking	170	2.30	391	300	2.30	690
		Total	2257.00		Total	6094.00
	Total activity costs
University	2257
Memorial	6094
4
	University	Memorial
Revenue	41730	41730
Less: Costs
Cost of goods sold	39000	39000
Activity costs	2257	6094
Customer margin	473	-3364