QUESTION: B 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: ACTIVITY COST POOL (ACTIVITY MEASURE) TOTAL COST TOTAL ACTIVITY CUSTOMER DELIVERIES (NUMBER OF DELIVERIES) MANUAL ORDER PROCESSING (NUMBER OF MANUAL ORDERS) ELECTRONIC ORDER PROCESSING (NUMBER OF ELECTRONIC ORDERS) $500,000 $248,000 5,000 DELIVERIES 4,000 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) TOTAL SELLING AND ADMINISTRATIVE EXPENSES 602,000 $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 COST WORLEY $30,000 TO BUY FROM ITS MANUFACTURERS): ACTIVITY MEASURE ACTIVITY 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 COMPUTE THE ACTIVITY RATE FOR EACH ACTIVITY COST POOL.
QUESTION: B 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: ACTIVITY COST POOL (ACTIVITY MEASURE) TOTAL COST TOTAL ACTIVITY CUSTOMER DELIVERIES (NUMBER OF DELIVERIES) MANUAL ORDER PROCESSING (NUMBER OF MANUAL ORDERS) ELECTRONIC ORDER PROCESSING (NUMBER OF ELECTRONIC ORDERS) $500,000 $248,000 5,000 DELIVERIES 4,000 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) TOTAL SELLING AND ADMINISTRATIVE EXPENSES 602,000 $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 COST WORLEY $30,000 TO BUY FROM ITS MANUFACTURERS): ACTIVITY MEASURE ACTIVITY 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 COMPUTE THE ACTIVITY RATE FOR EACH ACTIVITY COST POOL.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:QUESTION: B
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:
ACTIVITY COST POOL (ACTIVITY MEASURE)
TOTAL
COST
TOTAL ACTIVITY
CUSTOMER DELIVERIES (NUMBER OF DELIVERIES)
MANUAL ORDER PROCESSING (NUMBER OF MANUAL ORDERS)
ELECTRONIC ORDER PROCESSING (NUMBER OF ELECTRONIC
ORDERS)
$500,000
$248,000
5,000 DELIVERIES
4,000 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)
TOTAL SELLING AND ADMINISTRATIVE EXPENSES
602,000
$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 COST WORLEY $30,000 TO BUY FROM ITS
MANUFACTURERS):
ACTIVITY MEASURE
ACTIVITY
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
COMPUTE THE ACTIVITY RATE FOR EACH ACTIVITY COST POOL.
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