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 8%. For example, if a hospital buys supplies from Worley that had 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 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 $35,000 to buy from its manufacturers):

  

Activity

  

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

Total Revenue

University

Memorial

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

Activity Cost pool

Activity Rate

Customer deliveries

Per delivery

Manual Order processing

Per manual order

Electronic order processing

Per electronic order

Line item picking

Per line item picked

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

Total Activity Cost

University

Memorial

4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $35,000 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.)

Total Margin

University

memorial

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 had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies.

Explanation / Answer

1. Revenue received would be 8% more than the cost incurred,

Since cost incurred us $35,000, Revenue received from both hospotals is 35000 * (1+8%) = 35000 * 1.08 = 37800

2. Activity rate is calculated as total cost for that activity / total activity

Activity rate for Customer deliveries = 450000 / 5000 = 90

Similarly other activity costs are calculated in the table below

3. Total activity costs for hospitals is calculated below

University = 90 * 17 + 73 * 0 + 19 * 15 + 1.4 * 160 = 2,039

Memorial =  90 * 27 + 73 * 43 + 19 * 0 + 1.4 * 250 = 5,919

4. Profit = Total revenue - Total costs

University = 37800 - 35000 - 2039 = 761

Margin = Profit / Revenue = 2.01%

Memorial = 37800 - 35000 - 5919 = -3119

Margin = Profit / Revenue = -8.25%

Activity Cost Pool Activity Rate Customer deliveries 90 Per delivery Manual Order processing 73 Per manual order Electronic order processing 19 Per electronic order Line item picking 1.4 Per line item picked

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