Question Details

(solution) Worley Company buys surgical supplies from a variety of



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:

  

Activity Cost Pool (Activity Measure) Total Cost Total Activity
Customer deliveries (Number of deliveries) $ 588,000 7,000 deliveries
Manual order processing (Number of manual orders)   360,000 5,000 orders
Electronic order processing (Number of electronic orders)   260,000 10,000 orders
Line item picking (Number of line items picked)   1,250,000 500,000 line items
Other organization-sustaining costs (None)   660,000    
Total selling and administrative expenses $ 3,118,000    

 

  

  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 $38,000 to buy from its manufacturers):

 

 

Activity

Activity Measure University Memorial
Number of deliveries 17 21
Number of manual orders 0 45
Number of electronic orders 12 0
Number of line items picked 100 290

  

 

Required:

1. Compute the total revenue that Worley would receive from University and 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
Electronic order processing 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.)

 

 

4. Compute Worley?s customer margin for University and Memorial. (Hint: Do not overlook the $38,000 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.)

 

 


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