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) $ 430,000 5,000 deliveries Manual order processing (Number of manual orders) 539,000 7,000 orders Electronic order processing (Number of electronic orders) 253,000 11,000 orders Line item picking (Number of line items picked) 1,128,000 480,000 line items Other organization-sustaining costs (None) 670,000 Total selling and administrative expenses $ 3,020,000 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 $31,000 to buy from manufacturers): Activity Activity Measure University Memorial Number of deliveries 17 20 Number of manual orders 0 46 Number of electronic orders 17 0 Number of line items picked 150 280 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 $31,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

ANS:-
1		Calculation of revenue that Worley would receive from University and Memorial
	Particular	Amount
	Cost of goods sold	31000
	Mark Up 7%	2170
	Total revenue to be received	33170
2	Computaion of activity rate for each activity cost pool.
	Activity	Activity Base	Activity Base Cost	Activity Base Usage	Activity Rate $
	Customer deliveries	Number of deliveries	430,000	5000	86
	Manual order processing	Number of manual orders	539,000	7000	77
	Electronic order processing	Number of electronic orders	253,000	11000	23
	Line item picking	Number of line items picked	1,128,000	480000	2
	items Other organization-sustaining costs	None	670,000
		Total Activity Costs	3,020,000
3	Computation the total activity costs that would be assigned to University and Memorial
	Activity	Activity Base	Activity Rate $	Activity Base Usage		Activity Base Cost
				University	Memorial	University	Memorial
	Customer deliveries	Number of deliveries	86	17	20	1,462	1,720
	Manual order processing	Number of manual orders	77	0	46	-	3,542
	Electronic order processing	Number of electronic orders	23	17	0	391	-
	Line item picking	Number of line items picked	2	150	280	353	658
	items Other organization-sustaining costs	None	-
		Total Activity Costs				2,206	5,920
4	Compute Worley’s customer margin for University and Memorial.
		University	Memorial
	Cost of goods sold	31000	31000
	Mark Up 7%	2170	2170
	Total Activity Costs	2,206	5,920
	Customer Margin loss	(36)	(3,750)