Question

2.

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)	$	540,000	6,000	deliveries
Manual order processing (Number of manual orders)		504,000	7,000	orders
Electronic order processing (Number of electronic orders)		253,000	11,000	orders
Line item picking (Number of line items picked)		635,500	410,000	line items
Other organization-sustaining costs (None)		650,000
Total selling and administrative expenses	$	2,582,500

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 $31,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	20	20
Number of manual orders	0	40
Number of electronic orders	12	0
Number of line items picked	170	280

Required:

1.

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

	Total Revenue University Memorial

2.

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

Activity Cost Pool Activity Rate Customer deliveries per delivery Manual order processing per manual order Electronic order processing per electronic order Line item picking per line item picked 3. Compute the total activity costs that would be assigned to University and Memorial. Total Activity Costs University Memorial 4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $31,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amounts should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places. Round your final answers to the nearest whole number.) Customer Margin University Memorial

Answer 1

Part 1
		Total Revenue
	Revenue generated by University($31,000*1.07)	$                  33,170
	Revenue generated by Memorial($31,000*1.07)	$                  33,170
	Total revenue	$                  66,340
Part 2	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Customer deliveries	$                540,000	6,000	$                                               90.00	per deliveries
	Manual order processing	$                504,000	7,000	$                                               72.00	per manual order
	Electronic order processing	$                253,000	11,000	$                                               23.00	per electronic order
	Line item picking	$                635,500	410,000	$                                                 1.55	per line item
	Total Activity Cost	$             1,932,500
Part 3
			University	Memorial
		ABC Rate	Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
	Customer deliveries	$                    90.00	20	$                                               1,800	20	$                                     1,800
	Manual order processing	$                    72.00	0	$                                                     -	40	$                                     2,880
	Electronic order processing	$                    23.00	12	$                                                  276	0	$                                          -
	Line item picking	$                      1.55	170	$                                                  264	280	$                                        434
	Total Activity Cost allocated			$                                          2,339.50		$                                5,114.00
Part 4		University	Memorial
	Service Revenue	$             33,170.00	$                            33,170.00
	Less:Cost of goods sold	$             31,000.00	$                            31,000.00
	Less:Activity Cost allocated	$               2,339.50	$                              5,114.00
	Customer Margin	$                     -170	$                                  -2,944