Problem:
Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patients are self-payers. The hospitals patient accounts manager estimates that 10% of the hospital's billngs are paid (received by the hospital) on Day 30, 60 percent are paid on Day 60, and 30% are paid on Day 90. (Five percent of total billings end up as bad debt losses, but that is not relevant for this problem).
Required:
Question 1: What is Fargo's average collection period ? (Assume 360 days per year throughout this problem).
Question 2: What is the hospital's current receivables balance?
Question 3: 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?
Question 4: Suppose the hospital's annual cost of carrying receivables was 10%. If the element 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.)
Note: Please provide through step by step calculations.