1. You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows: Number of visits10,000 Utilities $2,500 Wages and benefits $220,000 Medical supplies $50,000 Rent $5,000 Administrative supplies $10,000 Depreciation $30,000 Assume that all costs are fixed except supplies costs, which are variable.
a. What is the clinic's underlying cost structure?
b. What are the clinic's expected total costs?
c. What are the clinic's estimated total costs at 7,500 visits? At 12,500 visits?
d. What is the average cost per visit at 7,500, 10,000, and 12,500 visits?
2. Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for General Administration and Financial Services is patient services revenue, while the cost driver for Facilities is space utilization.
a. What are the appropriate allocation rates?
b. Allocate the hospital's overhead costs to the patient services departments.
3. Assume that the hospital uses salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for Facilities, and patient services revenue as the cost driver for Financial Services. (The majority of the costs of the Facilities Department are devoted to housekeeping services.)
a. What are the appropriate allocation rates?
b. Allocate the hospital's overhead costs to the patient services departments.
c. Compare the dollar allocations with those obtained in Problem 4.6. Explain the differences.
d. Which of the two cost driver schemes is better? Explain your answer.
4. The Audiology Department at Randall Clinic offers many services to the clinic's patients. The three most common, along with cost and utilization data, are as follows:
Variable Cost Annual Direct Annual Number Service per Service Fixed Costs of Visits Basic examination $5 $50,000 3,000 Advanced examination 730,000 1,500 Therapy session 1040,000 500
a. What is the fee schedule for these services, assuming that the goal is to cover only variable and direct fixed costs?
b. Assume that the Audiology Department is allocated $100,000 in total overhead by the clinic, and the department director has allocated $50,000 of this amount to the three services listed above. What is the fee schedule assuming that these overhead costs must be covered? (To answer this question, assume that the allocation of overhead costs to each service is made on the basis of number of visits.)
c. Assume that these services must make a combined profit of $25,000. Now, what is the fee schedule? (To answer this question, assume that the profit requirement is allocated in the same way as overhead costs.
5. General Hospital, a not-for- profit acute care facility, has the following cost structure for its inpatient services: Fixed costs$10,000,000Variable cost per inpatient day 200 Charge (revenue) per inpatient day 1,000 The hospital expects to have a patient load of 15,000 inpatient days next year.
a. Construct the hospital's base case projected P'L statement.
b. What is the hospital's breakeven point?
c. What volume is required to provide a profit of $1,000,000? A profit of $500,000?
d. Now, assume that 20 percent of the hospital's inpatient days come from a managed care plan that wants a 25 percent discount from charges. Should the hospital agree to the discount proposal?