Worley Company buys surgical supplies from a variety of manu

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 $ 516,000 6,000 deliveries 355,000 270,000 15,000 orders 714,000 420,000 line items 610.000 5,000 orders $2,465,000 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 $37000 to buy from manufacturers) Activit Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked Universit Memorial 21 16 18 110 200

Solution

(1)

Total Revenue

University (37000 * 108%)

39960

Memorial (37000 * 108%)

39960

(2)

Activity Cost Pool

Activity Rate

Customer Deliveries

(516000/6000) = 86

Per delivery

Manual Order Processing

(355000/5000) = 71

Per manual order

Electronic Order Processing

(270000/15000) = 18

Per electronic order

Line Item Picking

(714000/420000) = 1.70

Per line item picked

(3) Total Activity cost Assigned :-

University

Memorial

Customer Deliveries

(16 * 86)

= 1376

(21 * 86)

= 1806

Manual Order Processing

0

(41 * 71)

= 2911

Electronic Order Processing

(18 * 18)

= 324

0

Line Item Picking

(110 * 1.70)

= 187

(200 * 1.70)

= 340

Total Activity cost Assigned

1887

5057

(4) Customer Margin :-

University

Memorial

Revenue

39960

39960

(-) COGS

37000

37000

(-) Cost assign

1887

5057

Margin

1073

-2097

	Total Revenue
University (37000 * 108%)	39960
Memorial (37000 * 108%)	39960