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

Question

a. Compute the total revenue that Worley would receive from University and Memorial. b. Compute the activity rate for each activity cost pool. c. Compute the total activity cost that would be assigned to University and Memorial. d. Compute Worley’s customer margin for University and Memorial. (Hint: do not overlook the $30,000 cost of goods sold that Worley incurred serving each hospital.) Worley Company buys surgical supplies from a varlety of manufacturers and then resells and delvers 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 5% For example, a hospital buys supplies from Worley that had 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 adminlstrative expenses Into five activiues as shown below Total Cost Total $ 500,000 5,000 deliverles Customer deliverles (Number of deliverles) Manual order processing (Number of manual orders)248,000 Electronic order processing (Number of electronic 4,000 orders 200,000 12,500 orders orders) Line Item picking (Number of line Items picked) Other organization-sustalning costs (None) 450,000450,000 line Items 602,000 Total selling and administrative expenses $2,000,000 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 $30,000 to buy from Its manufacturers) Activity University Memorial Activity Measure Number of deliveres Number of manual orders Number of electronic orders Number of line ltems picked 25 30 10 0 15 120 250

Explanation / Answer

REQ A: REVENUES FROM BOTH HOSPITALS UNIVERSITY MEMORIAL Cost of Goods sold 30000 30000 Add; Markup of 5% of cost 1500 1500 Revenue from hospital 31500 31500 REQB: Activity rate: STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Customer deliveries deliveries 500000 5000 100 Manual Order processing orders 248,000 4,000 62 Electronic order processing orders 200,000 12,500 16 Line picking Line items 450,000 450,000 1 REQC: Activity cost assigned: Activity Rate UNIVERSITY MEMORIAL Activity Incurred OH Activity Incurred OH Customer deliveries 100 10 1000 25 2500 Manual Order processing 62 0 0 30 1860 Electronic order processing 16 15 240 0 0 Line picking 1 120 120 250 250 Total Overheads 1360 4610 REQD: University Memorial Sales revenue 31500 31500 Less: Cost Cost of supplies 30000 30000 OH cost 1360 4610 Margin 140 -3110

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