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) 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 $ 516,000 6,000 deliveries 390,000 5,000 orders 308,000 14,000 orders 736,000 460,000 line items 680,000 $2,630,000 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 $39,000 to buy from manufacturers): Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked Activity University Memorial 26 0 13 160 220 48

Answer 1

	University	Memorial
Total Revenue	41,730	41,730
2.Activity Rate = Overhead Cost/Total Activity
Customer Deliveries	86
Manual Order Processing	78
Electronic Order Processing	22
Line item picking	1.6
Cost Assigned = Activity Rate*Activity Driver
	University	Memorial
Customer Deliveries	946	2,236
Manual Order Processing	-	3,744
Electronic Order Processing	286	-
Line item picking	256	352
Total cost	1,488	6,332
Customer Margin = Revenue - Cost
	University	Memorial
Customer Margin	1,242	(3,602)

A University =39000*1.07 Memorial =39000*1.07 2 Total Revenue 4 2.Activity Rate = Overhead Cost/Total Activity 5 6 Customer Deliveries 7 Manual Order Processing 8 Electronic Order Processing 9 Line item picking =516000/6000 =390000/5000 =308000/14000 =736000/460000 10 11 Cost Assigned = Activity Rate* Activity Driver 12 13 Customer Deliveries 14 Manual Order Processing 15 Electronic Order Processing 16 Line item picking 17 Total cost 18 19 Customer Margin = Revenue - Cost University Memorial =$B6*11 =$B6*26 =$B7*0 =$B7*48 =$B8*13 =$B8*0 =$B9*160 =$B9*220 =SUM(B13:B16) =SUM(C13:C16) || 20 University =B2-39000-B17 Memorial =C2-39000-C17 21 Customer Margin