Worley Company buys surgical supplies from a variety of manufacturers and then r

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, if a hospital buys supplies from Worley that had 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 below:

  Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $37,000 to buy from its manufacturers):

Activity

Compute the total revenue that Worley would receive from University and Memorial.

Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.)

Customer Deliveries

Manual Order Processing

Electronic Order Processing

Line Item Picking

Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.)

Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $37,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.

University

Memorial

     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 below:

Explanation / Answer

Activity Cost Pool (Activity Measure) Total Cost Total Activity Activity rate     Customer deliveries (Number of deliveries) $ 445,000 5,000 deliveries $              89.00   Manual order processing (Number of manual orders) 525,000 7,000 orders $              75.00   Electronic order processing (Number of electronic orders) 260,000 13,000 orders $              20.00   Line item picking (Number of line items picked) 1,035,000 450,000 line items $                2.30   Other organization-sustaining costs (None) 690,000   Total selling and administrative expenses $ 2,955,000 1.00 Total Revenue Cost of goods sold Mark Up @6% Total Revenue University    37,000.00        2,220.00 $ 39,220.00 Memorial    37,000.00        2,220.00 $ 39,220.00 2.00 Activity rate for each activity Activity Cost Pool (Activity Measure) Activity rate     Customer deliveries (Number of deliveries) $        89.00   Manual order processing (Number of manual orders) $        75.00   Electronic order processing (Number of electronic orders) $        20.00   Line item picking (Number of line items picked) $          2.30 3.00 Activity rate for each activity University Memorial Activity Cost Pool (Activity Measure) Activity rate   Activity Qty Amt $ Activity Qty Amt $   Customer deliveries (Number of deliveries) $        89.00              14.00        1,246.00          24.00            2,136.00   Manual order processing (Number of manual orders) $        75.00                     -                       -            48.00            3,600.00   Electronic order processing (Number of electronic orders) $        20.00              15.00            300.00                 -                           -     Line item picking (Number of line items picked) $          2.30            150.00            345.00        230.00                529.00 Total Selling & distr overhead allocated          1,891.00            6,265.00 4.00 Customer margin University Memorial Revenue      39,220.00      39,220.00 Cost of goods sold    37,000.00      37,000.00 Selling & Distr overhead allocated      1,891.00        6,265.00 Tota cost    38,891.00      43,265.00 Margin            329.00      (4,045.00)

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