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:
Required:
TUTORIAL PREVIEW
Total revenue received:
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 Cost
|
Total Activity
|
||
|
Customer deliveries
(Number of deliveries)
|
$
|
500,000
|
5,000
|
deliveries
|
|
Manual order
processing (Number of manual orders)
|
|
248,000
|
4,000
|
orders
|
|
Electronic order
processing (Number of electronic orders)
|
|
200,000
|
12,500
|
orders
|
|
Line item picking
(Number of line items picked)
|
|
450,000
|
450,000
|
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 Measure
|
University
|
Memorial
|
|
Number of
deliveries
|
10
|
25
|
|
Number of manual
orders
|
0
|
30
|
|
Number of
electronic orders
|
15
|
0
|
|
Number of line
items picked
|
120
|
250
|
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.)
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.)
Total revenue received:
|
|
University
|
Memorial
|
|
Cost of goods sold to the hospital (a)
|
$30,000
|
$30,000
|
|
Markup percentage
|
× 5%
|
× 5%
|
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