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 6%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $106 to purchase these supplies For years, Worley believed that the 6% 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 (Retivity Measure) Customer deliveries (Number of deliveries) Manual order processing Number of manual orders) Electronie order processing Number of electronie orders) Line Item picking (Number of line items picked) Other organization-sustaining costs (Mone) Total selling and administrative expenses Total cost Total Activity $ 332,000 4,000 deliveries 365,000 5,000 orders 240,000 12,000 orders 1,034,000 440,000 line items 610,000 $2,501,000 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 $36,000 to buy from manufacturers): Activity University Memorial 11 Activity Measure Sumber of deliveries Number of manual orders Number of electronic orders Number of line itens picked 120 210 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 $36,000 cost of goods sold that Worley incurred serving each hospital.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Compute the total revenue that Worley would receive from University and Memorial Revenue University Required 2 >

Answer 1

According to the requirement of the question, we have to compute revenue, activity rate, total activity costs and customer margin

Requirement 1:- Compute the total revenue that worley would receive from University and Memorial.

Solution:-

	Total Revenue
University (Working Note)	$38,160
Memorial (Working Note)	$38,160

Working Note:-

Total Revenue Received:

	University	Memorial
Cost of Goods sold to the hospital (a)	$36,000 (given)	$36,000 (given)
Markup percentage	6%	6%
Markup in dollars (b) ($36,000 * 6%)	$2,160	$2,160
Revenue received from hospitals (a) + (b)	$38,160	$38,160

Requirement 2:- Compute the activity rates for each activity cost pool.

Solution:-

Activity Cost Pool	Activity Rate
Customer deliveries (Working Note)	$83	per delivery
Manual order processing (Working Note)	$73	per manual order
Electronic order processing (Working Note)	$20	per electronic order
Line item picking (Working Note)	$2.35	per line item picked

Working Note:-

Activity Rates:

Activity Cost Pool	Estimated Overhead Cost	Expected		Activity Rate
	(a)	(b)	(a) / (b)	(c)
Customer Deliveries	$332,000	4,000 deliveries	$332,000 / 4,000	$83
Manual order processing	$365,000	5,000 orders	$365,000 / 5,000	$73
Electronic order processing	$240,000	12,000 orders	$240,000 / 12,000	$20
Line item picking	$1,034,000	440,000 line items	$1,034,000 / 440,000	$2.35

Requirement 3:- Compute the total Activity costs that would be assigned to University and Memorial.

Solution:-

	Total Activity Costs
University (Working Note)	$1,455
Memorial (Working Note)	$5,750.50

Working Note:-

Activity costs are assigned to the two hospitals as follows:

University:

Activity Cost Pool	Activity Rate	Activity	ABC Costs
	(a)	(b)	(a) * (b)
Customer deliveries	$83 per delivery	11	$913
Manual order processing	$73 per order	0	$0
Electronic order processing	$20 per order	13	$260
Line item picking	$2.35 per line item	120	$282
Total Activity Costs for University			$1,455

Memorial:

Activity Cost Pool	Activity Rate	Activity	ABC Costs
	(a)	(b)	(a) * (b)
Customer deliveries	$83 per delivery	22	$1,826
Manual order processing	$73 per order	47	$3,431
Electronic order processing	$20 per order	0	$0
Line item picking	$2.35 per line item	210	$493.50
Total Activity Costs for Memorial			$5,750.50

Requirement 4:- Compute Worley's Customer margin for University and Memorial.

Solution:-

	Customer Margin
University (Working Note)	$705
Memorial (Working Note)	$(3,590.50)

Working Note:-

Customer Margin for two hospitals:

	University	Memorial
Sales	$38,160	$38,160
Less: Cost of Goods Sold	$(36,000)	$(36,000)
Gross Margin (a)	$2,160	$2,160
Customer Deliveries	$913	$1,826
Manual Order Processing	$0	$3,431
Electronic Order Processing	$260	$0
Line Item Picking	$282	$493.50
Total Activity Costs (b)	$1,455	$5,750.50
Customer Margin (a) - (b)	$705	$(3,590.50)

Thank you..

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