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)	$	616,000	7,000	deliveries
Manual order processing (Number of manual orders)		608,000	8,000	orders
Electronic order processing (Number of electronic orders)		288,000	12,000	orders
Line item picking (Number of line items picked)		903,000	430,000	line items
Other organization-sustaining costs (None)		670,000
Total selling and administrative expenses	$	3,085,000

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 $36,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	19	25
Number of manual orders	0	46
Number of electronic orders	15	0
Number of line items picked	120	250

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 $36,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

1. The total revenue that worley would receive from University and Memorial
worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 7%
If a hospital buys supplies from worley that cost worley 36000 to buy from manufacturers ,worley would charge the hospital 38520 to purchase these supplies.
	2520	(36000*7/100)
Total Revenue =	38520	(36000+2520)
2. The activity rate for each activity cost pool
Activity Cost Pools	Total Cost	Total Activity	cost drivers	Activity Rate
customer deliveries	616000	7000	deliveries	88	per deliveries
manaual order processing	608000	8000	manaual orders	76	per orders
electronic order processing	288000	12000	electronic orders	24	per orders
line item picking	903000	430000	line item picked	2.1	per items
other	670000	not applicable		not applicable
Total	3085000
Activity rate =total cost/total activity
3. The total activity costs that would be assigned to university and memorial
Activity Cost Pools	university	memorial	Total
selling and administrative expenses assigned to products
no. of deliveries	266000	350000	616000	customer deliveries
no. of manaual orders	0	608000	608000	manaual order processing
no. of electronic orders	288000	0	288000	electronic order processing
no. of line item picked	292865	610135	903000	line item picking
sub total	846865	1568135	2415000
selling and administrative expenses not assigned to products
other			670000
Total Activity cost			3085000
4. Worley 's customer margin for university and memorial
	university	memorial	total
sales	38520	38520	77040
total cost	846865	1568135	2415000
customer margin	-808345	-1529615	-2337960
cost not assigned			670000
Net operating loss			-3007960