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 9%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies. For years, Worley believed that the 9% 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: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 261,000 3,000 deliveries Manual order processing (Number of manual orders) 576,000 8,000 orders Electronic order processing (Number of electronic orders) 260,000 13,000 orders Line item picking (Number of line items picked) 585,000 450,000 line items Other organization-sustaining costs (None) 700,000 Total selling and administrative expenses $ 2,382,000 Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (each hospital purchased medical supplies that had cost Worley $37,000 to buy from manufacturers): Activity Measure Activity University Memorial Number of deliveries 19 26 Number of manual orders 0 43 Number of electronic orders 18 0 Number of line items picked 170 230 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

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Exercise 7-10 (Algo) Customer Profitability Analysis [LO7-3, LO7-4, LO7-5]

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 9%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies.

For years, Worley believed that the 9% 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:

Activity Cost Pool (Activity Measure)	Total Cost	Total Activity
Customer deliveries (Number of deliveries)	$ 261,000	3,000	deliveries
Manual order processing (Number of manual orders)	576,000	8,000	orders
Electronic order processing (Number of electronic orders)	260,000	13,000	orders
Line item picking (Number of line items picked)	585,000	450,000	line items
Other organization-sustaining costs (None)	700,000
Total selling and administrative expenses	$ 2,382,000

Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (each hospital purchased medical supplies that had cost Worley $37,000 to buy from manufacturers):

Activity Measure		Activity
	University		Memorial
Number of deliveries	19		26
Number of manual orders	0		43
Number of electronic orders	18		0
Number of line items picked	170		230

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 $37,000 cost of goods sold that Worley incurred serving each hospital.)

Exercise 7-10 (Algo) Customer Profitability Analysis [LO7-3, LO7-4, LO7-5]
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 9%. For example, if a hospital
buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these
supplies.
For years, Worley believed that the 9% 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:
Total Activity
3,000 deliveries
8,000 orders
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 Cost
$ 261,000
576,000
260,000
585,000
13,000 orders
450,000 line items
700,000
Total selling and administrative expenses
$ 2,382,000
Worley gathered the data below for two of the many hospitals that it serves-University and Memorial (each hospital purchased
medical supplies that had cost Worley $37,000 to buy from manufacturers):
Activity
Activity Measure
University
Memorial
Number of deliveries
19
26
Number of manual orders
43
Number of electronic orders
Number of line items picked
18
170
230
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 $37,000 cost of goods sold that Worley
incurred serving each hospital.)
Complete this question by entering your answers in the tabs below.
Required 1
Required 2
Required 3
Required 4
Compute the total revenue that Worley would receive from University and Memorial.
Total Revenue
University

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