orley Company buys surgical supplies from a variety ofmanufacturers and then resells and delivers these supplies tohundreds of hospitals. Worley sets its prices for all hospitals bymarking up its cost of goods sold to those hospitals by 8%. Forexample, if a hospital buys supplies from Worley that cost Worley$100 to buy from manufacturers, Worley would charge the hospital$108 to purchase these supplies.
For years, Worley believed that the 8% markup covered itsselling and administrative expenses and provided a reasonableprofit. However, in the face of declining profits, Worley decidedto implement an activity-based costing system to help improve itsunderstanding of customer profitability. The company broke itsselling and administrative expenses into five activities asshown:
| Activity Cost Pool (Activity Measure) | Total Cost | Total Activity |
| Customer deliveries (Number of deliveries) | $ | 595,000 | 7,000 | deliveries |
| Manual order processing (Number of manual orders) | | 462,000 | 6,000 | orders |
| Electronic order processing (Number of electronic orders) | | 176,000 | 11,000 | orders |
| Line item picking (Number of line items picked) | | 587,500 | 470,000 | line items |
| Other organization-sustaining costs (None) | | 630,000 | | |
| Total selling and administrative expenses | $ | 2,450,500 | | |
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Worley gathered the data below for two of the many hospitalsthat it serves—University and Memorial (each hospital purchasedmedical supplies that had cost Worley $35,000 to buy frommanufacturers):
| Activity |
| Activity Measure | University | Memorial |
| Number of deliveries | 16 | 28 |
| Number of manual orders | 0 | 44 |
| Number of electronic orders | 13 | 0 |
| Number of line items picked | 140 | 300 |
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Required:
1. Compute the total revenue that Worley would receive fromUniversity and Memorial.
| Total Revenue | | University | | | Memorial | |
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2. Compute the activity rate for each activity cost pool.
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| | 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 |
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3. Compute the total activity costs that would be assigned toUniversity and Memorial.
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| | Total Activity Costs | | University | | | Memorial | |
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4. Compute Worley’s customer margin for University and Memorial.(Hint: Do not overlook the $35,000 cost of goods sold thatWorley incurred serving each hospital.)
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| | Customer Margin | | University | | | Memorial | |
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