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 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: 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 $ 672,000 8,000 deliveries 504,000 7,000 orders 264,000 12,000 orders 1,151,500 470,000 line items 630,000 $3,221,500 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 $39,000 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 15 28 0 43 19 0 10 240 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 $39,000 cost of goods sold that Worley incurred serving each hospital.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 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	$39,000	$39,000
	Add: Markup 8%	$3,120 [39,000*8%]	$3,120
	Selling revenue	$42,120 [$39,000+$3,120]	$42,120

2) Activity rate

Activity	Estimated cost	Activity base	usage of activity	Activity rate
Customer deliveries	$672,000.00	Nos of deliveries	8,000	$84[$672,000/8,000] per delivery
Manual order processing	$504,000.00	Nos of manual orders	7,000	$72 [$504,000/7,000] per manual order
Electronic order processing	$264,000.00	Nos of electronic orders	12,000	$22 [$264,000/12,000] per electronic order
Line item picking	$1,151,500.00	Nos of line item picked	470,000	$2.45 [$1,151,500/470,000] per line item picked
Others	$630,000

3] Activity cost assigned

	University	Memorials
	activity used	Cost allocated	activity used	Cost allocated
Customer deliveries	15	$1,260[15*$84]	28	$2,352[$84*28]
Manual order processing	0	-	43	$3,096[$72*43]
Electronic order processing	19	$418[19*$22]	0	-
Line item picking	110	$269.5[110*$2.45]	240	$588[240*$2.45]
Total cost		$1,947.5		$6,036

4]

	University	memorial
sales revenue	$42,120	$42,120
Cost of goods sold	$39,000	$39,000
Gross margin	$3,120	$3,120
Selling and administrative expenses	$1,947.5	$6,036
Customer Margin	$1,173[$3,120-1947.5]	($2,916)

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