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)	$	360,000	4,000	deliveries
Manual order processing (Number of manual orders)		648,000	9,000	orders
Electronic order processing (Number of electronic orders)		338,000	13,000	orders
Line item picking (Number of line items picked)		594,000	440,000	line items
Other organization-sustaining costs (None)		650,000
Total selling and administrative expenses	$	2,590,000

  

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 $30,000 to buy from its manufacturers):

  

	Activity
Activity Measure	University	Memorial
Number of deliveries	13	25
Number of manual orders	0	45
Number of electronic orders	18	0
Number of line items picked	130	290

  

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 $30,000 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

Answer:

1.

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

	Total Revenue
University	32,700
Memorial	32,700

2.

Compute the activity rate for each activity cost pool

	Activity Rates
Custom deliveries	90.00	per deliveries
Manual order processing	72.00	orders
Electronic order processing	26.00	orders
Line item picking	1.35	line items

3.

Compute the total activity costs that would be assigned to University and Memorial.

	Total Activity Costs
University	1,813.50
Memorial	5,881.50

4.

Compute Worley’s customer margin for University and Memorial.

	Customer Margin
University	886.50
Memorial	-3,181.50

Calculation:

1.

Here we need to compute the total revenue that Worley would receive from University and Memorial.

For that we need to take the cost of goods sold to the hospital and then multiply with the Mark up percentage to get the Mark up in dollars.

Then we need to add the Mark up in dollars with the Cost of goods sold to the hospital

	University	Memorial
Cost of goods sold to the hospital (a)	30,000	30,000
Mark up percentage	9%	9%
Mark up in dollars (b)	2,700	2,700
Revenue received from hospitals (a) + (b)	32,700	32,700

2.

Here we need to compute the activity rate for each activity cost pool.

For that we need to divide the estimated overhead cost with the expected activity.

The calculation is done below:

Activity Cost Pool	(a) Estimated Overhead cost	(b) Expected Activity	(c) = (a)/(b) Activity Rates
Customer deliveries	360,000	4,000	90	per deliveries
Manual order processing	648,000	9,000	72	orders
Electronic order processing	338,000	13,000	26	orders
Line item picking	594,000	440,000	1.35	line items

3.

Here we need to compute the total activity costs that would be assigned to University and Memorial.

For that first we need to take the estimated Overhead cost and then multiply with the expected activity to get the Activity Rates.

University:

(a) Estimated Overhead cost		(b) Expected Activity		(c) = (a) x (b) ABC Cost
90.00	per deliveries	13	deliveries	1,170
72.00	orders	0	orders	-
26.00	orders	18	orders	468
1.35	line items	130	line items	176

Total Activity Costs = 1,170 + 0 + 468 + 176 = 1,814

Memorial:

Activity Cost Pool	(a) Estimated Overhead cost		(b) Expected Activity		(c) ABC Cost
Customer deliveries	90.00	per deliveries	25	deliveries	2,250
Manual order processing	72.00	orders	45	orders	3,240
Electronic order processing	26.00	orders	0	orders	-
Line item picking	1.35	line items	290	line items	392

Total Activity Costs = 2,250 + 3,240 + 0 + 392 = 5,882

4.

Here we need to compute Worley’s customer margin for University and Memorial.

For that first we need to deduct the cost of goods sold from the sales to get the Gross margin.

Then we need to deduct the activity costs calculated to get the Customer margin.

	University	Memorial
Sales	32,700	32,700
Cost of goods sold	30,000	30,000
Gross Magin	2,700	2,700
Custom deliveries	1,170	2,250
Manual order processing	-	3,240
Electronic order processing	468	-
Line item picking	176	392
Total activity costs	1,814	5,882
Customer margin	887	(3,182)