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 9%. For example, if a hospital buys supplies from Worley that 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: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 510,000 6,000 deliveries Manual order processing (Number of manual orders) 288,000 4,000 orders Electronic order processing (Number of electronic orders) 336,000 14,000 orders Line item picking (Number of line items picked) 697,500 450,000 line items Other organization-sustaining costs (None) 680,000 Total selling and administrative expenses $ 2,511,500 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 $38,000 to buy from manufacturers): Activity Activity Measure University Memorial Number of deliveries 15 26 Number of manual orders 0 48 Number of electronic orders 14 0 Number of line items picked 110 220 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:

Explanation / Answer

Req 1: STATEMENT SHOWING TOTAL REVENUE FROM HOSPITALS UNIVERSITY MEMORIAL Cost of Supplies in $ 38,000 38,000 Add: Mark-up 3420 3420 (@9% of cost of supplies) (38,000*9%) (38,000*9%) Total Revenue from Hospitals 41,420 41,420 Requirement 2: DETERMINATION OF ACTIVITY RATES ACTIVITIES COST DRIVER TOTAL COST ANNUAL COST DRIVER ACTIVITY RATE (Total Cost/Annual Cost driver) Customer Deliveries Number of deliveries 510,000 6,000 deliveries $85 per delivery Manual Order Processing Number of Manual Order 288,000 4,000 orders $72 per manual order Electronic Order Processing Number of Electronic Orders 336,000 14,000 orders $24 per Electronic Order Orders Line Picking Number of Line itmes Picked 697,500 450,000 line picked $1.55 Per line picked Other Sustaining Cost NONE 680,000 NONE NONE Req 3: COMPUTATION OF ACTIVITY COST OF EACH HOSPITALS UNIVERSITY MEMORIAL Number of Deliveries 15 26 Number of Manual Orders 0 48 Number of Electronic Orders 14 0 Number of lines items picked 110 220 Activity Cost: Customer Deliveries (@85 per delivery) 1275.00 2210.00 (15*85) (26*85) Manual Order Processing(@72 per manual order) 0.00 3456.00 (0*72) (48*72) Electronic Order Processing(@24 per electronic order) 336.00 0.00 (14*24) (0*24) Orders line Picking(@1.55 per line items picked) 170.50 341.00 (110*1.55) (220*1.55) TOTAL ACTIVITY COST OF EACH HOSPITAL 1781.50 6007.00 Requirement 4: WORLEY CUSTOMER MARGIN UNIVERSITY MEMORIAL Total Revenues from hospitals(See requirement-1) 41420.00 41420.00 Less: Total cost Cost of Supplies 38000.00 38000.00 Activity cost (As computed in Req-3 above) 1781.50 6007.00 CUSTOMER MARGIN 1638.50 -2587.00 Note: Other Sustaining Cost of $ 680,000 will be deducted from Consolidated Income statement of Worley

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