Worley Company buys surgical supplies from a variety of manufacturers and then r
ID: 2401196 • Letter: W
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 5%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $105 to purchase these supplies.
For years, Worley believed that the 5% 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:
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 $31,000 to buy from manufacturers):
Activity
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 $31,000 cost of goods sold that Worley incurred serving each hospital.)
Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 492,000 6,000 deliveries Manual order processing (Number of manual orders) 504,000 7,000 orders Electronic order processing (Number of electronic orders) 253,000 11,000 orders Line item picking (Number of line items picked) 598,000 460,000 line items Other organization-sustaining costs (None) 690,000 Total selling and administrative expenses $ 2,537,000Explanation / Answer
Answers
University
Memorial
Total
Cost of purchase
$ 31,000.00
$ 31,000.00
$ 62,000.00
Margin
5%
5%
5%
Total Revenue
$ 32,550.00
$ 32,550.00
$ 65,100.00
Activity Cost Pool (Activity Measure)
Total Cost
Total Activity
Activity Rates
Customer deliveries (Number of deliveries)
$ 492,000.00
6000
deliveries
$ 82.00
per deliveries
Manual order processing (Number of manual orders)
$ 504,000.00
7000
orders
$ 72.00
per orders
Electronic order processing (Number of electronic orders)
$ 253,000.00
11000
orders
$ 23.00
per orders
Line item picking (Number of line items picked)
$ 598,000.00
460000
line items
$ 1.30
per line items
Other organization-sustaining costs (None)
$ 690,000.00
Total to be allocated
$ 2,537,000.00
Workings
UNIVERSITY
Activity Cost Pool (Activity Measure)
Total Cost
Activity Rates
No. of cost drivers
Cost Allocated
Customer deliveries (Number of deliveries)
$ 492,000.00
$ 82.00
per deliveries
15
$ 1,230.00
Manual order processing (Number of manual orders)
$ 504,000.00
$ 72.00
per orders
0
$ -
Electronic order processing (Number of electronic orders)
$ 253,000.00
$ 23.00
per orders
16
$ 368.00
Line item picking (Number of line items picked)
$ 598,000.00
$ 1.30
per line items
170
$ 221.00
Total Cost Allocated
$ 1,819.00
MEMORIAL
Activity Cost Pool (Activity Measure)
Total Cost
Activity Rates
No. of cost drivers
Cost Allocated
Customer deliveries (Number of deliveries)
$ 492,000.00
$ 82.00
per deliveries
26
$ 2,132.00
Manual order processing (Number of manual orders)
$ 504,000.00
$ 72.00
per orders
48
$ 3,456.00
Electronic order processing (Number of electronic orders)
$ 253,000.00
$ 23.00
per orders
0
$ -
Line item picking (Number of line items picked)
$ 598,000.00
$ 1.30
per line items
230
$ 299.00
Total Cost Allocated
$ 5,887.00
Answer
Overhead cost assigned to:
University
$ 1,819.00
Memorial
$ 5,887.00
University
Memorial
Total revenues
$ 32,550.00
$ 32,550.00
Less:
Cost of Goods Sold
$ 31,000.00
$ 31,000.00
Overhead cost allocated
$ 1,819.00
$ 5,887.00
Margin
$ (269.00)
$ (4,337.00)
University
Memorial
Total
Cost of purchase
$ 31,000.00
$ 31,000.00
$ 62,000.00
Margin
5%
5%
5%
Total Revenue
$ 32,550.00
$ 32,550.00
$ 65,100.00
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