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: Total Cost 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) $ 332,000 4,000 deliveries 450,000 6,000 orders 280,000 14.000 orders 1,025,000 410,000 line items 620,000 Total selling and administrative expenses $2,707,000 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 $34,000 to buy from its manufacturers): Activity Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked University Memorial 24 200 220 Required 1. Compute the total revenue that Worley would receive from University and Memorial ota Revenue University Memorial

Explanation / Answer

1. Revenue Total Revenue University Memorial Total $ $ $ Medicine cost 34000 34000 Activity Cost          1,610.00         5,617.00 Total Cost       35,610.00      39,617.00 Add:- Margin @ 6%          2,136.60         2,377.02 Total Revenue       37,746.60      41,994.02    79,740.62 *Other cost assume the fixed cost, therefore not allocating on the calculation of Pricing. 2 Activity Rate for each activitity pool Activity Cost Pool Total Cost Total Activity Activity Rate/Activity $ $/activity Customer Deliveries 332000 4000            83.00 Manual Order Processing 450000 6000            75.00 Electronic Order Processing 280000 14000            20.00 Line item picking 1025000 410000              2.50 3. Total Activity Cost University Memorial Total Activity Rate Total Activity Rate Total Number of Delivery 10               83.00          830.00 24         83.00 1,992.00    2,822.00 Number of Manual Order 0               75.00                   -   41         75.00 3,075.00    3,075.00 Number of Electronic Order 14               20.00          280.00 0         20.00                -         280.00 Number of line items picked 200                 2.50          500.00 220           2.50      550.00    1,050.00      1,610.00 5,617.00    7,227.00 4. Customer wise Margin University Memorial Total Reveune       37,746.60      41,994.02    79,740.62 Less:- cost       35,610.00      39,617.00    75,227.00 margin          2,136.60         2,377.02      4,513.62

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