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 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 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 $704,000 8,000 deliveries 639,000 288,000 12,000 orders 572,000 440,000 line items 640,000 9,000 orders $2,843,000 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 $33,000 to buy from manufacturers) Activit University Memorial Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked 16 18 190 220
ANSWER:
1. TOTAL REVENUE THAT WORLEY WOULD RECEIVE FROM UNIVERSITY AND MEMORIAL:
Total Revenue
University
$34980
Memorial
$34980
2. ACTIVITY RATE OF EACH ACTIVITY COST POOLS:
Activity Cost Pools
Activity Rate
Customer deliveries (704000/8000)
88.00
per delivery
Manual order processing (639000/9000)
71.00
per manual order
Electronic order processing (288000/12000)
24.00
per electronic order
Line item picking (572000/440000)
1.30
per line item picked
3. TOTAL ACTIVITY COST ASSIGNED TO UNIVERSITY AND MEMORIAL:
Activity Measure
University
Memorial
Activity
Cost
Activity
Cost
Number of deliveries
16
1408
22
1936
Number of manual orders
0
0
44
3124
Number of electronic orders
18
432
0
0
Number of line items picked
190
247
220
286
TOTAL ACTIVITY COST
2087
5346
4. WORLEY’S CUSTOMER MARGIN FOR UNIVERSITY AND MEMORIAL:
Particulars
University
Memorial
Total revenue
34980
34980
Less: Expenses
2087
5346
Margin
32893
29634
| Total Revenue |
| University | $34980 |
| Memorial | $34980 |
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