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 item picking (Number of line items picked) Other organization-sustaining costs (none) Total selling and administrative expenses Total Cost Total Activit $ 664,000 8,000 deliver 584,000 8,000 orders 252,000 12,000 orders 704,000 440,000 line it 680,000 $2,884,000 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 $37,000 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 19 29 0 50 14 130 290 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 $37,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

		University	Memorial
1)	Cost of goods sold to hospital	37,000	37000
	Markup percentage	9%	9%
	mark up in amount	3,330	3330
	Total revenue	40,330	40330
2)	Activity Cost Pool	Estimated Overhead cost	Estimated Activity(Total)	Activity rate
	Customer deliveries	664,000	8,000	83.00	per deliveries
	manual order processing	584,000	8,000	73.00	per order
	Electronic order processing	252,000	12,000	21.00	per order
	line item packing	704,000	440,000	1.60	per line item
	Total	2,204,000
3)		Activity rate	University(Cost Driver)	University (MOH Allocation)	memorial (Cost Driver)	Memorial (MOH Allocation)
	Customer deliveries	83.00	19	1,577.00	29	2,407.0
	manual order processing	73.00	-	-	50	3,650.0
	Electronic order processing	21.00	14	294.00	-	-
	line item packing	1.60	130	208.00	290	464.0
	Total activity cost			2,079.00		6,521.0
4)		Univesity	Memorial
	Sales Revenue	40,330.00	40,330.00
	Less: Cost of goods sold	(37,000.00)	(37,000.00)
	Less: Overhead allocated	(2,079.00)	(6,521.0)
	net customer margin	1,251.00	(3,191.00)