Question

In: Accounting

Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these...

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 5%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $105 to purchase these supplies.

For years, Worley believed that the 5% 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) $ 500,000 5,000 deliveries
Manual order processing (Number of manual orders) 248,000 4,000 orders
Electronic order processing (Number of electronic orders) 200,000 12,500 orders
Line item picking (Number of line items picked) 450,000 450,000 line items
Other organization-sustaining costs (None) 602,000
Total selling and administrative expenses $ 2,000,000

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 10 25
Number of manual orders 0 30
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 $30,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign.)

Solutions

Expert Solution

1
University Memorial
Cost of goods sold 30000 30000
Add: Markup @ 5% 1500 1500
Total Revenue 31500 31500
2
Activity cost pool Total cost Total activity Activity rate
Customer deliveries 500000 5000 100.00 per delivery
Manual order processing 248000 4000 62.00 per manual order
Electronic order processing 200000 12500 16.00 per electronic order
Line item picking 450000 450000 1.00 per line item picked
3
University Memorial
Activity cost pool Activity Activity rate Cost allocated Activity Activity rate Cost allocated
Customer deliveries 10 100.00 1000 25 100.00 2500
Manual order processing 0 62.00 0 30 62.00 1860
Electronic order processing 15 16.00 240 0 16.00 0
Line item picking 120 1.00 120 250 1.00 250
Total 1360.00 Total 4610.00
Total activity costs
University 1360
Memorial 4610
4
University Memorial
Revenue 31500 31500
Less: Costs
Cost of goods sold 30000 30000
Activity costs 1360 4610
Customer margin 140 -3110

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