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
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 8%. For example, if a hospital buys supplies from Worley
that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies.
For years, Worley believed that the 8% 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:
Worley gathered the data below for two of the many hospitals that it servesUniversity and
Memorial (each hospital purchased medical supplies that had cost Worley $37,000 to buy from
manufacturers):Activity
Activity Measure University Memorial
Number of deliveries
14
21
Number of manual orders
0
45
Number of electronic orders
17
0
Number of line items picked
130
250
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 Worleys customer margin for University and Memorial. (
Hint
: Do not overlook the
$37,000 cost of goods sold that Worley incurred serving each hospital.)
5. Describe the purchasing behaviors that are likely to characterize Worleys least profitable
customers.
Activity Cost Pool (Activity Measure)
Total Cost
Total Activity
Customer deliveries (Number of deliveries)
$249,000
3,000 deliveries
Manual order processing (Number of manual
orders)
308,000
4,000
orders
Electronic order processing (Number of
electronic orders)
260,000
10,000
orders
Line item picking (Number of line items
picked)
648,000
480,000
line items
Other organization-sustaining costs (None)
650,000
Total selling and administrative expenses
$2,115,000
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 8%. For example, if a hospital buys supplies from Worley
that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies.
For years, Worley believed that the 8% 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:
Worley gathered the data below for two of the many hospitals that it servesUniversity and
Memorial (each hospital purchased medical supplies that had cost Worley $37,000 to buy from
manufacturers):Activity
Activity Measure University Memorial
Number of deliveries
14
21
Number of manual orders
0
45
Number of electronic orders
17
0
Number of line items picked
130
250
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 Worleys customer margin for University and Memorial. (
Hint
: Do not overlook the
$37,000 cost of goods sold that Worley incurred serving each hospital.)
5. Describe the purchasing behaviors that are likely to characterize Worleys least profitable
customers.
Activity Cost Pool (Activity Measure)
Total Cost
Total Activity
Customer deliveries (Number of deliveries)
$249,000
3,000 deliveries
Manual order processing (Number of manual
orders)
308,000
4,000
orders
Electronic order processing (Number of
electronic orders)
260,000
10,000
orders
Line item picking (Number of line items
picked)
648,000
480,000
line items
Other organization-sustaining costs (None)
650,000
Total selling and administrative expenses
$2,115,000
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