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) $ 356,000 4,000 deliveries Manual order processing (Number of manual orders) 450,000 6,000 orders Electronic order processing (Number of electronic orders) 252,000 14,000 orders Line item picking (Number of line items picked) 799,000 470,000 line items Other organization-sustaining costs (None) 630,000 Total selling and administrative expenses $ 2,487,000 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 $38,000 to buy from its manufacturers): Activity Activity Measure University Memorial Number of deliveries 14 20 Number of manual orders 0 46 Number of electronic orders 18 0 Number of line items picked 180 200 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 $38,000 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
	University	Memorial
Cost of goods sold	38000	38000
Add: Markup @ 9%	3420	3420
Total Revenue	41420	41420
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	356000	4000	89.00	per delivery
Manual order processing	450000	6000	75.00	per manual order
Electronic order processing	252000	14000	18.00	per electronic order
Line item picking	799000	470000	1.70	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	14	89.00	1246	20	89.00	1780
Manual order processing	0	75.00	0	46	75.00	3450
Electronic order processing	18	18.00	324	0	18.00	0
Line item picking	180	1.70	306	200	1.70	340
		Total	1876.00		Total	5570.00
	Total activity costs
University	1876
Memorial	5570
4
	University	Memorial
Revenue	41420	41420
Less: Costs
Cost of goods sold	38000	38000
Activity costs	1876	5570
Customer margin	1544	-2150