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 9%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies For years, Worley believed that the 9% 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 Ites picking (Number of line ites picked) Other organization-sustaining costs (none) Total selling and administrative expenses Total Cost $ 440.000 432.000 255.000 648.000 680,000 $2,455,000 Total Activity 5. deliveries 6,000 orders 15.000 orders 480,00 line tres 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 $33,000 to buy from manufacturers): Activity University Porial Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line ites picked 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 $33,000 cost of goods sold that Worley incurred serving each hospital)

Answer 1

1
	University	Memorial
Cost of goods sold	33000	33000
Add: Markup @ 9%	2970	2970
Total Revenue	35970	35970
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	440000	5000	88.00	per delivery
Manual order processing	432000	6000	72.00	per manual order
Electronic order processing	255000	15000	17.00	per electronic order
Line item picking	648000	480000	1.35	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	18	88.00	1584.00	23	88.00	2024.00
Manual order processing	0	72.00	0.00	49	72.00	3528.00
Electronic order processing	17	17.00	289.00	0	17.00	0.00
Line item picking	110	1.35	148.50	230	1.35	310.50
		Total	2021.50		Total	5862.50
	Total activity costs
University	2022	or 2021.50
Memorial	5863	or 5862.50
4
	University	Memorial
Revenue	35970	35970
Less: Costs
Cost of goods sold	33000	33000
Activity costs	2022	5863
Customer margin	949	-2893
	or 948	or -2892