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 cost Worley $100 to buy from manufacturers, Worley would charge the hospital $106 to purchase these supplies. For years, Worley believed the 6% 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 improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 324,000 4,000 deliveries Manual order processing (Number of manual orders) 375,000 5,000 orders Electronic order processing (Number of electronic orders) 242,000 11,000 orders Line item picking (Number of line items picked) 1,127,000 460,000 line items Other organization-sustaining costs (None) 650,000 Total selling and administrative expenses $ 2,718,000 Worley gathered the data below for two of the many hospitals it serves—University and Memorial (each hospital purchased medical supplies that cost Worley $39,000 to buy from manufacturers): Activity Measure Activity University Memorial Number of deliveries 16 28 Number of manual orders 0 47 Number of electronic orders 14 0 Number of line items picked 110 270 Required: Compute the total revenue Worley would receive from University and Memorial. Compute the activity rate for each activity cost pool. Compute the total activity costs assigned to University and Memorial. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $39,000 cost of goods sold that Worley incurred serving each hospital.)

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 cost Worley $100 to buy from manufacturers, Worley would charge the hospital $106 to purchase these supplies. For years, Worley believed the 6% 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 improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 324,000 4,000 deliveries Manual order processing (Number of manual orders) 375,000 5,000 orders Electronic order processing (Number of electronic orders) 242,000 11,000 orders Line item picking (Number of line items picked) 1,127,000 460,000 line items Other organization-sustaining costs (None) 650,000 Total selling and administrative expenses $ 2,718,000 Worley gathered the data below for two of the many hospitals it serves—University and Memorial (each hospital purchased medical supplies that cost Worley $39,000 to buy from manufacturers): Activity Measure Activity University Memorial Number of deliveries 16 28 Number of manual orders 0 47 Number of electronic orders 14 0 Number of line items picked 110 270 Required: Compute the total revenue Worley would receive from University and Memorial. Compute the activity rate for each activity cost pool. Compute the total activity costs assigned to University and Memorial. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $39,000 cost of goods sold that Worley incurred serving each hospital.)

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 14E: Many different businesses employ markup on cost to arrive at a price. For each of the following...

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Activity Cost Pool (Activity Measure)	Total Cost	Total Activity
Customer deliveries (Number of deliveries)	$ 324,000	4,000	deliveries
Manual order processing (Number of manual orders)	375,000	5,000	orders
Electronic order processing (Number of electronic orders)	242,000	11,000	orders
Line item picking (Number of line items picked)	1,127,000	460,000	line items
Other organization-sustaining costs (None)	650,000
Total selling and administrative expenses	$ 2,718,000

Activity Measure	Activity
Number of deliveries	16	28
Number of manual orders	0	47
Number of electronic orders	14	0
Number of line items picked	110	270

Required:

Compute the total revenue Worley would receive from University and Memorial.
Compute the activity rate for each activity cost pool.
Compute the total activity costs assigned to University and Memorial.
Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $39,000 cost of goods sold that Worley incurred serving each hospital.)

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Activity Measure	Activity
University	Memorial
Number of deliveries	16	28
Number of manual orders	0	47
Number of electronic orders	14	0
Number of line items picked	110	270