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 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:

Activity Cost Pool (Activity Measure) Total Cost Total Activity
Customer deliveries (Number of deliveries) $ 324,000 4,000 deliveries
Manual order processing (Number of manual orders) 576,000 8,000 orders
Electronic order processing (Number of electronic orders) 230,000 10,000 orders
Line item picking (Number of line items picked) 567,000 420,000 line items
Other organization-sustaining costs (None) 640,000
Total selling and administrative expenses $ 2,337,000

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 $34,000 to buy from manufacturers):

Activity

Activity Measure University Memorial
Number of deliveries 16 30
Number of manual orders 0 47
Number of electronic orders 18 0
Number of line items picked 180 290

Required:

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

2. Compute the activity rate for each activity cost pool.

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 $34,000 cost of goods sold that Worley incurred serving each hospital.

Solutions

Expert Solution

1
University Memorial
Cost of goods sold 34000 34000
Add: Markup @ 5% 1700 1700
Total Revenue 35700 35700
2
Activity cost pool Total cost Total activity Activity rate
Customer deliveries 324000 4000 81.00 per delivery
Manual order processing 576000 8000 72.00 per manual order
Electronic order processing 230000 10000 23.00 per electronic order
Line item picking 567000 420000 1.35 per line item picked
3
University Memorial
Activity cost pool Activity Activity rate Cost allocated Activity Activity rate Cost allocated
Customer deliveries 16 81.00 1296.00 30 81.00 2430.00
Manual order processing 0 72.00 0.00 47 72.00 3384.00
Electronic order processing 18 23.00 414.00 0 23.00 0.00
Line item picking 180 1.35 243.00 290 1.35 391.50
Total 1953.00 Total 6205.50
Total activity costs
University 1953.00
Memorial 6205.50
4
University Memorial
Revenue 35700 35700
Less: Costs
Cost of goods sold 34000 34000
Activity costs 1953.00 6205.50
Customer margin -253.00 -4505.50

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