Exercise 7-10 customer Profitabllity Analysls [LO7-3, LO7-4, LO7-5] Worley Compa
ID: 2401263 • Letter: E
Question
Exercise 7-10 customer Profitabllity Analysls [LO7-3, LO7-4, LO7-5] 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 7% For example. if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $107 to purchase these supplies. For years, Worley believed that the 7% 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 480,000 6,800 deliveries 584,880 366,8e6 15,8e0 orders 868,800 430,000 line items e0,800 7,880 orders $2,904, e00 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 manufactuFrs): Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line itess picked University Memori 17 24 19 138 226 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 $37.000 cost of goods sold that Worley incurred serving each hospital.)Explanation / Answer
Answers
University
Memorial
Total
Cost of purchase
$ 37,000.00
$ 37,000.00
$ 74,000.00
Margin
7%
7%
5%
Total Revenue
$ 39,590.00
$ 39,590.00
$ 79,180.00
Activity Cost Pool (Activity Measure)
Total Cost
Total Activity
Activity Rates
Customer deliveries (Number of deliveries)
$ 480,000.00
6000
deliveries
$ 80.00
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)
$ 360,000.00
15000
orders
$ 24.00
per orders
Line item picking (Number of line items picked)
$ 860,000.00
430000
line items
$ 2.00
per line items
Other organization-sustaining costs (None)
$ 700,000.00
Total to be allocated
$ 2,904,000.00
Workings
UNIVERSITY
Activity Cost Pool (Activity Measure)
Total Cost
Activity Rates
No. of cost drivers
Cost Allocated
Customer deliveries (Number of deliveries)
$ 480,000.00
$ 80.00
per deliveries
17
$ 1,360.00
Manual order processing (Number of manual orders)
$ 504,000.00
$ 72.00
per orders
0
$ -
Electronic order processing (Number of electronic orders)
$ 360,000.00
$ 24.00
per orders
19
$ 456.00
Line item picking (Number of line items picked)
$ 860,000.00
$ 2.00
per line items
130
$ 260.00
Total Cost Allocated
$ 2,076.00
MEMORIAL
Activity Cost Pool (Activity Measure)
Total Cost
Activity Rates
No. of cost drivers
Cost Allocated
Customer deliveries (Number of deliveries)
$ 480,000.00
$ 80.00
per deliveries
24
$ 1,920.00
Manual order processing (Number of manual orders)
$ 504,000.00
$ 72.00
per orders
44
$ 3,168.00
Electronic order processing (Number of electronic orders)
$ 360,000.00
$ 24.00
per orders
0
$ -
Line item picking (Number of line items picked)
$ 860,000.00
$ 2.00
per line items
220
$ 440.00
Total Cost Allocated
$ 5,528.00
Answer:
Overhead cost assigned to:
University
$ 2,076.00
Memorial
$ 5,528.00
University
Memorial
Total revenues
$ 39,590.00
$ 39,590.00
Less:
Cost of Goods Sold
$ 37,000.00
$ 37,000.00
Overhead cost allocated
$ 2,076.00
$ 5,528.00
Margin
$ 514.00
$ (2,938.00)
University
Memorial
Total
Cost of purchase
$ 37,000.00
$ 37,000.00
$ 74,000.00
Margin
7%
7%
5%
Total Revenue
$ 39,590.00
$ 39,590.00
$ 79,180.00
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