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 8% For
example, if a hospital buys supplies from Worley that had cost
Worley $100 to buy from manufactures, Worley would charge the
hospital $108 to purchase these supplies.
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
below:
Activity Cost
Pool
Activity
Measure
Total Cost
Total Activity
Customer
deliveries
Number of deliveries
$
696,000
8,000
deliveries
Manual order
processing
Number of manual orders
420,000
6,000
orders
Electronic order
processing
Number of electronic orders
224,000
14,000
orders
Line item
picking
Number of line items picked
1,175,000
470,000
line items
Other organizational costs
(None) 610,000
Total selling and administrative expenses
$
3,125,000
Worley gathered the data below
for two of the many hospitals that it serves
