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Exercise 7-10 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 5%, For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital S105 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: Total CostlTotal Activity Activity Cost Pool (Activity Measure) Customer deliveries (Number of dellverles) Hanual order processing (Nunber of manual orders) Electronic order processing umber of electronic orders) Line item picking (Number of line itees picked) other organization-sustaining costs (ne) %500,000 5,000 deliveries 248,000 4,000 orders 200,000 12,500 orders 450,000 450,000 1ine items 602.000o Total selling and adeinistrative expenses $2,000, ee0 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 $30,000 to buy from manufacturers) tivity Reasure Nunber of deliverles Unkversity 10 25

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