Question

For years, Worley believed that the 8% 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)	$	510,000	6,000	deliveries
Manual order processing (Number of manual orders)		355,000	5,000	orders
Electronic order processing (Number of electronic orders)		275,000	11,000	orders
Line item picking (Number of line items picked)		1,128,000	470,000	line items
Other organization-sustaining costs (None)		630,000
Total selling and administrative expenses	$	2,898,000

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 $40,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	15	30
Number of manual orders	0	41
Number of electronic orders	18	0
Number of line items picked	110	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 $40,000 cost of goods sold that Worley incurred serving each hospital.)

Compute the total revenue that Worley would receive from University and Memorial.

	Total Revenue
University
Memorial

Activity Cost Pool	Activity Rate
Customer deliveries		per delivery
Manual order processing		per manual order
Electronic order processing		per electronic order
Line item picking		per line item picked

	Total Activity Costs
University
Memorial

	Customer Margin
University
Memorial

Answer 1