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 8%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies. For years, Worley believed that the 8% 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) 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 $ 415,000 385,000 360,000 881,500 660,000 $ 2,701,500 Total Activity 5,000 deliveries 5,000 orders 15,000 orders 410,000 line items 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 $32,000 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 19 0 17 130 Memorial 27 47 0 200 Required: 1. Compute the total revenue that Worley would receive from University and Memorial. Total Revenue University Memorial

Answer 1

		University	Memorial
1)	Cost of goods sold to hospital	32,000	32000
	Markup percentage	8%	8%
	mark up in amount	2,560	2560
	Total revenue	34,560	34560
2)	Activity Cost Pool	Estimated Overhead cost	Estimated Activity(Total)	Activity rate
	Customer deliveries	415,000	5,000	83.00	per deliveries
	manual order processing	385,000	5,000	77.00	per order
	Electronic order processing	360,000	15,000	24.00	per order
	line item packing	881,500	410,000	2.15	per line item
	Total	2,041,500
3)		Activity rate	University(Cost Driver)	University (MOH Allocation)	memorial (Cost Driver)	Memorial (MOH Allocation)
	Customer deliveries	83.00	19	1,577.00	27	2,241.0
	manual order processing	77.00	-	-	47	3,619.0
	Electronic order processing	24.00	17	408.00	-	-
	line item packing	2.15	130	279.50	200	430.0
	Total activity cost			2,264.50		6,290.0
4)		Univesity	Memorial
	Sales Revenue	34,560.00	34,560.00
	Less: Cost of goods sold	(32,000.00)	(32,000.00)
	Less: Overhead allocated	(2,264.50)	(6,290.0)
	net customer margin	295.50	(3,730.00)