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 5106 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) $ 410.000 5.000 deliveries Manual order processing Number of manual orders) 420,000 6,000 orders Electronic order processing (Number of electronic orders) 264,000 11.000 orders Line item picking (Number of line items picked) 903,000 430.000 line items Other organization-sustaining costs (None) 690.000 Total selling and administrative expenses $ 2,687,000 Worley gathered the data below for two of the many hospitals that it serves-University and Memorial (both hospitals purchased purchased a total qu total quantity from its manufacturers): f medical supplies that had cost Worley $30,000 to buy Activity Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked University 12 0 20 110 Memorial 26 45 0 280 Required: 1. Compute the total revenue that Worley would receive from University and Memorial. Total Revenue University Memorial 2. Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) Activity Cost Pool Customer deliveries Manual order processing Electronic order processing Line item picking Activity Rate per delivery per manual order per electronic order per line item picked

Answer 1

1)
Particulars	Universal	Memorial
Cost of goods sold	$ 30,000	$ 30,000
Add: Markup - 6%	$ 1,800	$ ,1800
Total Revenue	$ 31,800	$ 31,800
2)
Activity	Total Overhead Cost (A)	Activity Base	Total Activity (B)	Activity Rate ( A / B )
Customer deliveries	$ 410,000	Number of deliveries	5,000	$ 82
Manual order processing	$ 420,000	Number of manual orders	6,000	$ 70
Electronic order processing	$ 264,000	Number of electronic orders	11,000	$ 24
Line item packing	$ 903,000	Number of line item picked	430,000	$ 2.10
Activity	Activity Rate (A)	Universal		Memorial
Usage (B)	Allocated Costs (A x B )	Usage (c )	Allocated Costs (A x C )
Customer deliveries	$ 82	12	$ 984	26	$ 2,132
Manual order processing	$ 70	0	$ 0	45	$ 3,150
Electronic order processing	$ 24	20	$ 480	0	$ 0
Line item packing	$ 2.10	110	$ 231	280	$ 588
Total Activity Costs			$ 1,695		$ 5,870
4)
Particulars	Universal	Memorial
Sales Revenue	$ 31,800	$ 31,800
Less: Cost of goods sold	($ 30,000)	($ 30,000)
Gross Margin	$ 1,800	$ 1,800
Less: Selling and administrative expenses	($ 1,695)	($ 5,870)
Customer margin	$ 105	($ 4,070)