The Hospital losing money
The St. Xavier Healing touch Hospital is famous and leading hospital in Los Angles and providing healthcare facilities from many years. From last two years the hospital is facing the financial problems and it is also visible by doing the analysis on budgeted data and actual data for the years of 2001 and 2002. The financial problems are resulted in the loss of 0.2 million dollars in year 2001 and 0.8 million dollars in the years 2002.
It is expected that the loss in the actual results as compared to the budgeted results happen due to the over estimation of the revenue in the budgeted data and also increase in the nursing and lease expenses. Overestimation of the revenues and lower estimation of the expenses results in the unfavorable profit for the year.
Recommended Cost Driver
The finance department is considering three cost drivers to allocate overheads for the servicers of X-ray, MRI and CT-scan. The recommended cost driver is supplies per procedure because each service is providing different number of procedure for each activity. Allocation of overheads according to the number of supplies or number of procedures is the most suitable measure. The service which is supplying more number of procedures should allocate more overheads.
In addition to the current cost data and overheads, the additional cost data is also given for these services and it is based upon the number of hours per procedure. There is no complexity in charging the additional cost because the number of supplies and staff hours per procedure is given for each activity therefore allocating overheads on the staff hours is not an appropriate measure.
Allocation of the overheads related to medical supplies on the basis of supplies per procedure is giving the actual figure of overheads that should be allocated to each supply because it is given the cost of each service according to the number of procedures supplied to that activity.
The number of procedure supplied by the X-ray is the maximum among the other services, therefore X-ray service charging is maximum amount of overhead. It will be unfair to allocate overheads to the other services on other basis because the overheads allocate according to the other cost driver will provide the unfair allocation of the overheads and will leads to the wrong decision making which will affect the overall performance of the organization.
Recommended Capital Investment
Currently the Healing Touch has three available options of capital investments for the purpose of expansion that are Alpha proposal, Beta Proposal and Gamma Proposal. Each Proposal has different capital requirements, different time period of completion and providing different facilities.
But the purpose of each capital investment is to earn more revenue. Proposal Alpha involves the construction of the new wing of orthopedic department. It is expected that the construction of the new wing will increase the revenue by increase the number of patients served than the existing facility. In order to make the decision relevant and fair it is expected that the increase in revenue by construction of the new wing will be equal to the revenue that is being generated by the second capital investment. It takes 12 months to complete the new wing and it cost 1.6 million dollars to Healing Touch.
It is expected that the useful life f the increased facility will be 10 years and at the end of the useful life the estimated residual value of the increased facility will be 0.8 million dollars. By assuming the revenues of the second available option it is expected that the capital investment 1n will generate the positive NPV of 1.94 million dollars. The projects that give the positive NPV increase the value of the entity and fulfill the shareholders requirement of increase in the wealth of their share. Therefore the capital investment 1 is fulfilling the shareholders requirement by maximizing their wealth and adding value in the total value of the company.
The St. Xavier Healing Touch Hospital Case Solution
The second available option is proposal beta. Under this proposal the new surgical center will be constructed and it is expected that with the construction of the new surgical center the capacity of the average surgery per day will be double. The new surgical center will takes two years to complete and approximately 0.6 million dollars will be spent for this purpose. It is expected that the addition 200 dollar per surgery will also be incur under the expansion facility than the existing facility....................
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