The Adelaide Private Hospital has 3 patient services departments - Adult Medicine, Obstetrics and Pediatrics. It also has 3 patient support departments - administration, Facilities and Finance.
The revenues of the three patient services departments are:
Adult medicine $12 million
Obstetrics $6 million
Pediatrics $2 million
The direct costs of all 6 departments are:
Adult medicine $6 million
Obstetrics $3.6 million
Pediatrics $1.2 million
Administration $1 million
Facilities $4.4 million
Finance $1.8 million
Direct costs of the support departments are allocated to patient services departments using the direct method on the basis of the % of services provided by the support departments to the patient service departments.
Table 1 below gives the percentages of support provided by the support departments to both each other and the services departments. For example, 10% of admin's services are provided to the finance department and 20% to obstetrics.
Table 1
|
% of services provided by
|
|
Services provided to
|
Admin
|
Facilities
|
Finance
|
|
Admin
|
0
|
5
|
5
|
|
Facilities
|
10
|
0
|
5
|
|
Finance
|
10
|
10
|
0
|
|
Adult Medicine
|
35
|
55
|
50
|
|
Obstetrics
|
20
|
10
|
25
|
|
Pediatriacs
|
25
|
20
|
15
|
|
Total
|
100
|
100
|
100
|
a. Allocate the support department overheads to the 3 patient service departments on the basis of the % of services provided.
b. Calculate the profit and loss position for each of the patient service departments and the hospital as a whole.
c. Should the hospital consider closing down any or all of the patient service departments to increase its profitability or reduce its losses? Explain why or why not.