Worley Company buys surgical supplies from a variety of manufacturers and then r
ID: 342149 • Letter: W
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 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) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 430,000 5,000 deliveries Manual order processing (Number of manual orders) 539,000 7,000 orders Electronic order processing (Number of electronic orders) 253,000 11,000 orders Line item picking (Number of line items picked) 1,128,000 480,000 line items Other organization-sustaining costs (None) 670,000 Total selling and administrative expenses $ 3,020,000 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 $31,000 to buy from manufacturers): Activity Activity Measure University Memorial Number of deliveries 17 20 Number of manual orders 0 46 Number of electronic orders 17 0 Number of line items picked 150 280 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 $31,000 cost of goods sold that Worley incurred serving each hospital.)
Explanation / Answer
ANS:- 1 Calculation of revenue that Worley would receive from University and Memorial Particular Amount Cost of goods sold 31000 Mark Up 7% 2170 Total revenue to be received 33170 2 Computaion of activity rate for each activity cost pool. Activity Activity Base Activity Base Cost Activity Base Usage Activity Rate $ Customer deliveries Number of deliveries 430,000 5000 86 Manual order processing Number of manual orders 539,000 7000 77 Electronic order processing Number of electronic orders 253,000 11000 23 Line item picking Number of line items picked 1,128,000 480000 2 items Other organization-sustaining costs None 670,000 Total Activity Costs 3,020,000 3 Computation the total activity costs that would be assigned to University and Memorial Activity Activity Base Activity Rate $ Activity Base Usage Activity Base Cost University Memorial University Memorial Customer deliveries Number of deliveries 86 17 20 1,462 1,720 Manual order processing Number of manual orders 77 0 46 - 3,542 Electronic order processing Number of electronic orders 23 17 0 391 - Line item picking Number of line items picked 2 150 280 353 658 items Other organization-sustaining costs None - Total Activity Costs 2,206 5,920 4 Compute Worley’s customer margin for University and Memorial. University Memorial Cost of goods sold 31000 31000 Mark Up 7% 2170 2170 Total Activity Costs 2,206 5,920 Customer Margin loss (36) (3,750)
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