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 had 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 below: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 445,000 5,000 deliveries Manual order processing (Number of manual orders) 390,000 5.000 orders Electronic order processing (Number of electronic orders) 294,000 14.000 orders Line item picking (Number of line items picked) 857,500 490.000 line items Other organization-sustaining costs (None) 660,000 Total selling and administrative expenses $ 2,646,500 Worley gathered the data below for two of the many hospitals that it serves-University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $33,000 to buy from its manufacturers): Activity Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked University 12 0 10 160 Memorial 25 44 0 200 Required: 1. Compute the total revenue that Worley would receive from University and Memorial. Total Revenue University Memorial

Answer 1

1
	University	Memorial
Cost of goods sold	33000	33000
Add: Markup @ 6%	1980	1980
Total Revenue	34980	34980
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	445000	5000	89.00	per delivery
Manual order processing	390000	5000	78.00	per manual order
Electronic order processing	294000	14000	21.00	per electronic order
Line item picking	857500	490000	1.75	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	12	89.00	1068	25	89.00	2225
Manual order processing	0	78.00	0	44	78.00	3432
Electronic order processing	10	21.00	210	0	21.00	0
Line item picking	160	1.75	280	200	1.75	350
		Total	1558.00		Total	6007.00
	Total activity costs
University	1558
Memorial	6007
4
	University	Memorial
Revenue	34980	34980
Less: Costs
Cost of goods sold	33000	33000
Activity costs	1558	6007
Customer margin	422	-4027