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)	$	648,000	8,000	deliveries
Manual order processing (Number of manual orders)		624,000	8,000	orders
Electronic order processing (Number of electronic orders)		300,000	12,000	orders
Line item picking (Number of line items picked)		1,058,000	460,000	line items
Other organization-sustaining costs (None)		620,000
Total selling and administrative expenses	$	3,250,000

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 $37,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	13	27
Number of manual orders	0	50
Number of electronic orders	19	0
Number of line items picked	120	280

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 $37,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

1
	University	Memorial
Cost of goods sold	37000	37000
Add: Markup @ 7%	2590	2590
Total Revenue	39590	39590
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	648000	8000	81.00	per delivery
Manual order processing	624000	8000	78.00	per manual order
Electronic order processing	300000	12000	25.00	per electronic order
Line item picking	1058000	460000	2.30	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	13	81.00	1053	27	81.00	2187.00
Manual order processing	0	78.00	0	50	78.00	3900.00
Electronic order processing	19	25.00	475	0	25.00	0.00
Line item picking	120	2.30	276	280	2.30	644.00
		Total	1804.00		Total	6731.00
	Total activity costs
University	1804.00
Memorial	6731.00
4
	University	Memorial
Revenue	39590	39590
Less: Costs
Cost of goods sold	37000	37000
Activity costs	1804	6731
Customer margin	786	-4141