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 8%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies. For years, Worley believed that the 8% 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) Customer deliveries (Number of deliveries) Manual order processing (Number of manual orders) Electronic order processing (Number of electronic orders) Line item picking (Number of line items picked) other organization-sustaining costs (None) Total selling and administrative expenses Total Cost Total Activity $ 516,00 6,000 deliveries 380,000 5,000 orders 252,000 14,000 orders 882,000 420,000 line items 680,000 $2,710,000 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 Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line itens picked 15 190 290

Answer 1

1) Memorial 36,000 $ Cost of goods sold to hospital (A) Markup percentage (B) Markup in dollars (C=AxB) Revenue received (A+C) Universal 36,000 $ 8% 2,880 $ 38,880 $ 8% 2,880 38,880 Universal Memorial Total Revenue 38,880 $ 38,880 Activity rate Activity Cost Pool Customer deliveries Manual order processing Electronic order processing Line item picking $ 86.00 per delivery 76.00 per manual order 18.00 per electronic order 2.10 per line item picked $ Working Notes Activity Cost Pool Customer deliveries Manual order processing Electronic order processing Line item picking Total Cost [A 516,000 $ 380,000 252,000 882,000 Total Activity [B] 6,000 deliveries 5,000 orders 14,000 Orders 420,000 line items Activity rate A/B $ 86.00 $ 76.00 $ 18.00 2.10

Universal Memorial Total Activity costs 2,131 6,599 Working Notes Activity Cost Pool Activity rate Activity [B] Universal Activity Cost [ AB] 17 $ Activity [C] [A] Memorial Activity Cost [ AC] 29 $ 2,494 3,496 1,462 46 Customer deliveries Manual order processing Electronic order processing Line item picking 86.00 76.00 18.00 2.10 ! 190 270 399 2,131 609 6,599 | Total Activity Costs $ Universal Memorial Customer Margin 749 $ (3,719) Working Notes Universal 38,880 (36,000) $ Memorial 38,880 (36,000) Revenue Less: Cost of goods sold Less: Selling & Administration expense based on Activity (2,131) 749 (6,599) (3,719) Customer Margin