Memorandum Los Reyes Hospital (B) Case Solution
Variances
By analyzing the Exhibit 1 of the memorandum, it has been identified that the major problem of the medicine department is the high variable costs and the variances in its prices. Due to the price variances, the medicine department is losing 150,000 dollars from its revenues as well as due to the high variable cost, the medicine department of the hospital is losing the 147,000 dollars.
Both of these figures are the huge amount for the medicine department as well as for the hospital which in total create the deficit of 331,500 dollars. The deficit amount includes the 34,500 dollars of unfavorable variance of total fixed cost which is added in the unfavorable price variance and unfavorable variable cost variance. These problems in deficits are the largest concerns for the medicine department of the hospital.
Recommendations
The comparison of the company’s actual figures with the standard figures resulted in findings that the actual total revenue of the company was less than the standard figure and the variable costs and the fixed costs were higher than the standard amounts. The revenue had an unfavorable variance of (150,000) dollars, mainly due to lower sale prices charged by the company for all of its test services. For instance, the standard per case fee for DRG 089 test was $6000 but the company charged 5500 dollars. So, the company should increase its sales price per case in all of the categories and it should follow the standards strictly in order to generate revenue in line with the expected figures.
On the other side, the actual variable costs and the fixed costs of the company were higher than the standard figures, which resulted in unfavorable variable cost variance of 147000 dollars and a n unfavorable fixed cost variance of 34500 dollars. So, the company should reduce the variable and fixed costs to the standard level by finding out films used in each case at lower rates, or by contracting with the suppliers, or by purchasing in huge amount and by firing extra and unskilled employees in order to get the variable and fixed costs reduced to standard levels...................
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