Worley company buys surgical supplies from a variety of manufacturers

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 5%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $105 to purchase these supplies.

 

 For years, Worley believed that the 5% 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 CostTotal Activity

  Customer deliveries (Number of deliveries)$500,0005,000 deliveries

  Manual order processing (Number of manual orders) 248,0004,000 orders

  Electronic order processing (Number of electronic orders) 200,00012,500 orders

  Line item picking (Number of line items picked) 450,000450,000 line items

  Other organization-sustaining costs (None) 602,000  

   

  Total selling and administrative expenses$2,000,000  

  

  

   

 

 

 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 $30,000 to buy from its manufacturers):

 

 Activity

  Activity MeasureUniversityMemorial

  Number of deliveries10          25          

  Number of manual orders0          30          

  Number of electronic orders15          0          

  Number of line items picked120          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 Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $30,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign.)

 

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