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 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 thatthe 8% markup covered its selling and administrative expenses andprovided a reasonable profit. However, in the face of decliningprofits, Worley decided to implement an activity-based costingsystem to help improve its understanding of customer profitability.The company broke its selling and administrative expenses into fiveactivities as shown: Activity Cost Pool (Activity Measure) TotalCost Total Activity Customer deliveries (Number of deliveries) $595,000 7,000 deliveries Manual order processing (Number of manualorders) 380,000 5,000 orders Electronic order processing (Number ofelectronic orders) 273,000 13,000 orders Line item picking (Numberof line items picked) 726,000 440,000 line items Otherorganization-sustaining costs (None) 680,000 Total selling andadministrative expenses $ 2,654,000 Worley gathered the data belowfor two of the many hospitals that it serves—University andMemorial (each hospital purchased medical supplies that had costWorley $32,000 to buy from manufacturers): Activity ActivityMeasure University Memorial Number of deliveries 17 26 Number ofmanual orders 0 44 Number of electronic orders 14 0 Number of lineitems picked 160 210 Required: 1. Compute the total revenue thatWorley would receive from University and Memorial. 2. Compute theactivity rate for each activity cost pool. 3. Compute the totalactivity costs that would be assigned to University and Memorial.4. Compute Worley’s customer margin for University and Memorial.(Hint: Do not overlook the $32,000 cost of goods sold that Worleyincurred serving each hospital.)
