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 had 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 below:
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) Total Cost $ 656,000 8,000 deliveries 518,000 7,000 orders 322,000 14,000 orders 1,075,000 500,000 line items 640,000 Total selling and administrative expenses $ 3,211,000 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 $33,000 to buy from its manufacturers) Activity Activity Measure Number of deliveries Number of manual orders Number of electronic orders Memorial 29 43 University 12 120 Number of line items picked 270 Required 1. Compute the total revenue that Worley would receive from University and Memorial Tota Revenue University Memorial 2. Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) Activity Cost Pool Activity Rate Customer deliveries per delivery Manual order processing per manual order per electronic order Line item picking per line item picked 3. Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.) Total Activity Costs University Memorial 4. Compute Worley's customer margin for University and Memorial. (Hint: Do not overlook the $33,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) Customer Margin University MemorialStep by Step Solution
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