of Worley Company buys surgical supplies from a variety of manufacturers and the
ID: 2411781 • Letter: O
Question
of Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds 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: Total cost Total Activity $ 680,000 8,000 deliveries Activity Cost Pool (Activity Measure) Custoner deliveries (Number of deliveries) Nanual order processing (Number of manual orders) Electronic order processing (Number of electronic orders) Line item picking (Nunber of line items picked) Other organization-sustaining costs (None) Total selling and administrative expenses 546,000 7,000 orders 200,000 10,000 orders 559,000 430,000 1ine items 640,000 $2,625,000 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 $38,000 to buy from manufacturers): Activity Heasure University Menorial 19 Nunber of deliveries Nunber of manual orders Nunber of electronic orders Number of line items picked 42 17 100 300 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 $38,000 cost of goods sold that WorleyExplanation / Answer
(2)
Activity cost pool
Activity Rate
Customer Deliveries
(680000/8000)
=85
Deliveries
Manual Order Processing
(546000/7000)
=78
Per Manual Order
Electronic Order Processing
(200000/10000)
=20
Per Electronic Order
Line Item Picking
(559000/430000)
=1.30
Per Line Item Picking
(3)
University
Memorial
Customer Deliveries(
(19 * 85)
=1615
(22 * 85)
=1870
Manual Order Processing
----
(42 * 78)
=3276
Electronic Order Processing
(17 * 20)
=340
----
Line Item Picking
(100 * 1.30)
=130
(300 * 1.30)
=390
2085
5536
(4) Margin:-
University
Memorial
Contribution (38000 * 8%)
3040
3040
(-) O/h assign
2085
5536
955
-2496
Activity cost pool
Activity Rate
Customer Deliveries
(680000/8000)
=85
Deliveries
Manual Order Processing
(546000/7000)
=78
Per Manual Order
Electronic Order Processing
(200000/10000)
=20
Per Electronic Order
Line Item Picking
(559000/430000)
=1.30
Per Line Item Picking
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