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)	$	328,000	4,000	deliveries
Manual order processing (Number of manual orders)		304,000	4,000	orders
Electronic order processing (Number of electronic orders)		252,000	12,000	orders
Line item picking (Number of line items picked)		777,000	420,000	line items
Other organization-sustaining costs (None)		680,000
Total selling and administrative expenses	$	2,341,000

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 $33,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	13	25
Number of manual orders	0	43
Number of electronic orders	15	0
Number of line items picked	140	260

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 $33,000 cost of goods sold that Worley incurred serving each hospital. The company provides service to customers (instead of selling products), so there will be no direct material or direct labor costs.

Answer 1

1
	University	Memorial
Cost of goods sold	33000	33000
Add: Markup @ 7%	2310	2310
Total Revenue	35310	35310
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	328000	4000	82.00	per delivery
Manual order processing	304000	4000	76.00	per manual order
Electronic order processing	252000	12000	21.00	per electronic order
Line item picking	777000	420000	1.85	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	13	82.00	1066	25	82.00	2050
Manual order processing	0	76.00	0	43	76.00	3268
Electronic order processing	15	21.00	315	0	21.00	0
Line item picking	140	1.85	259	260	1.85	481
		Total	1640.00		Total	5799.00
	Total activity costs
University	1640
Memorial	5799
4
	University	Memorial
Revenue	35310	35310
Less: Costs
Cost of goods sold	33000	33000
Activity costs	1640	5799
Customer margin	670	-3489