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 (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 $ 270,000 3,000 deliveries 380,000 5,000 orders 190,000 10,000 orders 846,000 470,000 line items 680,000 $2,366,000 Worley gathered the data below for two of the many hospitals that it servesUniversity and Memorial (each hospital purchased medical supplies that had cost Worley $35,000 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 16 21 0 47 19 190 270

Answer 1

1
	University	Memorial
Cost of goods sold	35000	35000
Add: Markup @ 6%	2100	2100
Total Revenue	37100	37100
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	270000	3000	90.00	per delivery
Manual order processing	380000	5000	76.00	per manual order
Electronic order processing	190000	10000	19.00	per electronic order
Line item picking	846000	470000	1.80	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	16	90.00	1440	21	90.00	1890.00
Manual order processing	0	76.00	0	47	76.00	3572.00
Electronic order processing	19	19.00	361	0	19.00	0.00
Line item picking	190	1.80	342	270	1.80	486.00
		Total	2143.00		Total	5948.00
	Total activity costs
University	2143
Memorial	5948
4
	University	Memorial
Revenue	37100	37100
Less: Costs
Cost of goods sold	35000	35000
Activity costs	2143	5948
Customer margin	-43	-3848