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 7%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $107 to purchase these supplies. For years, Worley believed the 7% 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) Customer deliveries (Number of deliveries) Manual order processing (Number of manual orders) Electronic order processing (Number of electronic orders) Line item picking (Number of line items picked) Other organization-sustaining costs (None) Total selling and administrative expenses Activity Measure Number of deliveries. Activity 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): University 12 0 16 120 Total Cost Memorial 30 47 0 280 $ 336,000 380,000 231,000 693,000 640,000 $ 2,280,000 Total Activity 4,000 deliveries. 5,000 orders. 11,000 orders 420,000 line items. Number of manual orders Number of electronic orders. Number of line items picked Required: 1. Compute the total revenue Worley would receive from University and Memorial. 2. Compute the activity rate for each activity cost pool. 3. Compute the total activity costs assigned to University and Memorial. 4. 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 7%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $107 to purchase these supplies. For years, Worley believed the 7% 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) Customer deliveries (Number of deliveries) Manual order processing (Number of manual orders) Electronic order processing (Number of electronic orders) Line item picking (Number of line items picked) Other organization-sustaining costs (None) Total selling and administrative expenses Activity Measure Number of deliveries. Activity 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): University 12 0 16 120 Total Cost Memorial 30 47 0 280 $ 336,000 380,000 231,000 693,000 640,000 $ 2,280,000 Total Activity 4,000 deliveries. 5,000 orders. 11,000 orders 420,000 line items. Number of manual orders Number of electronic orders. Number of line items picked Required: 1. Compute the total revenue Worley would receive from University and Memorial. 2. Compute the activity rate for each activity cost pool. 3. Compute the total activity costs assigned to University and Memorial. 4. 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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