Fargo memorial hospital has annual patient service revenues of 14,400,000. It has two major third-party payers, and some of its patients are self payers. The hospital's patient accounts manager estimates that 10 percent of the hospital's billings are paid (received by the hospital) on day 30, 60 percent are paid on day 60, and 30 percent are paid on day 90. (Five percent of total billings end up as bad debt losses, both that figure is not relevant to this problem.)
a. what is fargo's average collection period? (Assume 360 days per year throughout this problem.)
b. what is the hospital's current receivables balance?
c. what would be the hospital’s new receivables balance if a newly proposed electronic claims system resulted in collecting from third party payers in 45, and 75 days, instead of in 60 and 90 days?
d. suppose the hospital's annual cost of carrying receivables is 10 percent . If the electronic claims system costs $30,000 a year to lease and operate, should it be adopted? (Assume that the entire receivables balance has to be financed.)