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 al hospitals by marking up its cost of goods sold to those hospitals by 9%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies For years, Worley believed that the 9% 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: Total Activity 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 Cost $ 522,000 6,000 deliveries 438,000 6,000 orders 198,000 11,000 orders 675,000 450,000 line items 640,000 Total selling and administrative expenses $2,473,000 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 $38,000 to buy from its manufacturers) Activity Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked Memorial University 15 20 120 260

Explanation / Answer

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Total Revenue University =38000*1.09 41420 Memorial=38000*1.09 41420

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