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, ira hospital buys supplies from Worley that 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 Activity Cost Pool (Activity al Cost Custoner 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 adeinistrative expenses 5 $28,90e 6,e90 deliveries 616,880 8,8e0 orders 364,800 14,008 orders 1,102,500 400,000 1ine items 700,000 33, 310, se0 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 $37000 to buy from manufacturers) Actívity Heasure Number of deliverles Numben of manual ordens Number of electronic onders Number of 1ine itess picked University Menorial 13 28 48 17 188 28e 1 Compute the total revenue that Worley would receve from University and Memorial Comnute the activity rate for each activitv COSt DOOl

Answer 1

Computation of Revenues
			University	Memorial
cost of Goods sold			37000	37000
Add: Profit Margin @ 6%			2220	2220
Sales revenue			39220	39220
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Customer deliveries			Deliveries\	528000	6000	88.00	per delivery
Manual order processing			Order	616,000	8,000	77.00	per manual order
Electronic Order Processing			Orders	364,000	14,000	26.00	Per electronic order
Line item Picking			Lline items	1,102,500	490,000	2.25	Per line item