Question

Exercise 7-10 Customer Profitability Analysis (LO7-3, LO7-4, LO7-5] 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 10%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $110 to purchase these supplies. For years, Worley believed that the 10% 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 $ 336,000 584,000 204,000 630,000 680,000 $2,434,000 Total Activity 4,000 deliveries 8,000 orders 12,000 orders 420,000 line items 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 $32,000 to buy from manufacturers): Activity University Memorial 14 Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked 47 18 110 270 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 $32,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

1
	University	Memorial
Cost of goods sold	32000	32000
Add: Markup @ 10%	3200	3200
Total Revenue	35200	35200
2
Activity cost pool	Total cost	Total activity	Activity rate
Customer deliveries	336000	4000	84.00	per delivery
Manual order processing	584000	8000	73.00	per manual order
Electronic order processing	204000	12000	17.00	per electronic order
Line item picking	630000	420000	1.50	per line item picked
3
	University			Memorial
Activity cost pool	Activity	Activity rate	Cost allocated	Activity	Activity rate	Cost allocated
Customer deliveries	14	84.00	1176	24	84.00	2016
Manual order processing	0	73.00	0	47	73.00	3431
Electronic order processing	18	17.00	306	0	17.00	0
Line item picking	110	1.50	165	270	1.50	405
		Total	1647.00		Total	5852.00
	Total activity costs
University	1647
Memorial	5852
4
	University	Memorial
Revenue	35200	35200
Less: Costs
Cost of goods sold	32000	32000
Activity costs	1647	5852
Customer margin	1553	-2652
	Customer margin
University	1553
Memorial	-2652