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) Electronie 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 $ 35,000 5,000 deliveries 539,000 7,000 orders 220.000 11.000 orders 1,150,000 460,000 line items 630,000 $2,974,000 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 $33,000 to buy from manufacturers): Activity University Memorial Activity Measure Number of deliveries Nanbar ofal orders Number of electronie orders Number of line stona 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 @ 7%	2310	2310
Total Revenue	35310	35310
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	435000	5000	87.00	per delivery
Manual order processing	539000	7000	77.00	per manual order
Electronic order processing	220000	11000	20.00	per electronic order
Line item picking	1150000	460000	2.50	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	13	87.00	1131	26	87.00	2262
Manual order processing	0	77.00	0	47	77.00	3619
Electronic order processing	13	20.00	260	0	20.00	0
Line item picking	140	2.50	350	250	2.50	625
		Total	1741		Total	6506
	Total activity costs
University	1741
Memorial	6506
4
	University	Memorial
Revenue	35310	35310
Less: Costs
Cost of goods sold	33000	33000
Activity costs	1741	6506
Customer margin	569	-4196