Worley 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 10%. Forexample, if a hospital buys supplies from Worley that cost Worley$100 to buy from manufacturers, Worley would charge the hospital$110 to purchase these supplies.
For years, Worley believed that the 10% 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) | $ | 616,000 | 7,000 | deliveries |
| Manual order processing (Number of manual orders) | | 365,000 | 5,000 | orders |
| Electronic order processing (Number of electronic orders) | | 364,000 | 14,000 | orders |
| Line item picking (Number of line items picked) | | 875,000 | 500,000 | line items |
| Other organization-sustaining costs (None) | | 660,000 | | |
| Total selling and administrative expenses | $ | 2,880,000 | | |
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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 $39,000 to buy frommanufacturers):
| Activity |
| Activity Measure | University | Memorial |
| Number of deliveries | 10 | 20 |
| Number of manual orders | 0 | 45 |
| Number of electronic orders | 15 | 0 |
| Number of line items picked | 130 | 200 |
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Required:
1. Compute the total activity costs that would be assigned toUniversity and Memorial.
2. Compute Worley’s customer margin for University and Memorial.(Hint: Do not overlook the $39,000 cost of goods sold thatWorley incurred serving each hospital.)
