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 for all hospitals by marking up its cost of goods sold to those hospitals by 6%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $106 to purchase these supplies.

For years, Worley believed that the 6% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declinin 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) $ 352,000 4,000 deliveries
Manual order processing (Number of manual orders) 539,000 7,000 orders
Electronic order processing (Number of electronic orders) 308,000 14,000 orders
Line item picking (Number of line items picked) 858,000 440,000 line items
Other organization-sustaining costs (None) 670,000
Total selling and administrative expenses $ 2,727,000
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 $36,000 to buy from its manufacturers):
Activity
Activity Measure University Memorial
Number of deliveries 14 21
Number of manual orders 0 43
Number of electronic orders 14 0
Number of line items picked 160 260
Required:
1. Compute the total revenue that Worley would receive from University and Memorial.
Total 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 orde
Electronic order processing
Per electronic order
Line item picking
Per line item picked

Answer 1

Worley Company

1. The Total Revenue that Worley would receive from:

Total Revenue

University $1,963

Memorial $6,006

2. Computation of the activity rate for each activity cost pool:

Activity Cost Pool Activity Rate

Customer deliveries $88 Per delivery

Manual order processing $77 Per manual orde

Electronic order processing $22 Per electronic order

Line item picking $1.95 Per line item picked

Step-by-step explanation:

a) Data and Calculations:

Activity Cost Pool (Activity Measure) Total Cost Total Activity

Customer deliveries (Number of deliveries) $ 352,000 4,000 deliveries

Manual order processing (Number of manual orders) 539,000 7,000 orders

Electronic order processing (Number of electronic orders) 308,000 14,000 orders

Line item picking (Number of line items picked) 858,000 440,000

Other organization-sustaining costs (None) 670,000

Total selling and administrative expenses $ 2,727,000

Activity Measure University Memorial Rates

Number of deliveries 14 21 $88

Number of manual orders 0 43 $77

Number of electronic orders 14 0 $22

Number of line items picked 160 260 $1.95

Activity Rate: Overhead Costs Usage Rates (Cost/Usage)

Customer deliveries $ 352,000 4,000 deliveries $88.00

Manual order processing 539,000 7,000 orders $77.00

Electronic order processing 308,000 14,000 orders $22.00

Line item picking 858,000 440,000 $1.95

Other organization-sustaining costs 670,000

Total selling and administrative expenses $ 2,727,000

Total costs:

Activity Measure University Memorial

Number of deliveries $1,232 (14*$88) $1,848 (21*$88)

Number of manual orders 0 3,311 (43*$77)

Number of electronic orders 308 (14*$22) 0

Number of line items picked 312 (160*$1.95) 507(260*$1.95)

Total costs incurred $1,852 $5,666

Mark-up (6%) 111 340

Total Revenue $1,963 $6,006