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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 that 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 help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown.
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.)
Complete this question by entering your answers in the tabs below.
♦ Relevant knowledge
The formula to calculate the total revenue is quite simple. It relies on two information points. The first is the amount of products, services, and subscriptions that are sold. The second data element is the cost per unit. It is the price for a unit. can be the cost of something or the median price of units with various price points. The formula is as follows:
Total Revenue (TR) = Quantity Sold (Q) x Price (P)
Answers
University
Memorial
Total
Purchase price
$30,000.00
$30,000.00
$60,000.00
Margin
6%
6%
6%
Total Revenue
$31,800.00
$ 31,800.00
$63,600.00
Activity Cost Pool (Activity Measure)
Total Cost
Total Activity
Activity Rates
Customer deliveries (Number of deliveries)
$435,000.00
5000
Deliveries
$87.00
per deliveries
Manual order processing (Number manual orders)
$355,000.00
5000
Orders
$71.00
per orders
Electronic order processing (Number electronic orders)
$240,000.00
12000
Orders
$20.00
per orders
Line item selection (Number chosen)
$799,500.00
410000
Line items
$1.95
per line items
Overhead cost assigned to:
University
$2,226.00
Memorial
$6,493.00
–Workings
UNIVERSITY
Activity Cost Pool (Activity Measure)
Total Cost
Activity Rates
No. of cost drivers
Cost Allocated
Customer deliveries (Number of deliveries)
$435,000.00
$87.00
per deliveries
19
$1,653.00
Manual order processing (Number manual orders)
$355,000.00
$71.00
per orders
0
$ –
Electronic order processing (Number electronic orders)
$240,000.00
$20.00
per orders
15
$300.00
Line item selection (Number chosen)
$799,500.00
$1.95
per line items
140
$273.00
Total Cost Allocated
$2,226.00
MEMORIAL
Activity Cost Pool (Activity Measure)
Total Cost
Activity Rates
No. of cost drivers
Cost Allocated
Customer deliveries (Number of deliveries)
$435,000.00
$87.00
per deliveries
30
$2,610.00
Manual order processing (Number manual orders)
$355,000.00
$71.00
per orders
47
$3,337.00
Electronic order processing (Number electronic orders)
$240,000.00
$20.00
per orders
0
$ –
Line item selection (Number chosen)
$799,500.00
$1.95
per line items
280
$546.00
Total Cost Allocated
$6,493.00
University
Memorial
Total revenues
$31,800.00
$31,800.00
Less:
Selling price of goods
$30,000.00
$30,000.00
Allocation of overhead costs
$2,226.00
$6,493.00
Margin
$(426.00)
$(4,693.00)