West-mount Retirement Residence Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

West-mount Retirement Residence The case solution

Weaknesses

The key limitation of the current model is that it is not providing sufficient profits to the company. It is because of the fact that a single base rate is determined by dividing the total costs with the number of residents, and the prices for studio, one-bedroom and two-bedroom services are kept 25% and 50% above the base cost, after adjusting with the inflation of 5%. There are residents who do not use all of services and there are residents who require low, medium or high level of services. Despite a variation in the requirement of services; a single price is charged, which is stipulated according to the base cost. This results in relatively low prices and higher costs is ultimately leading to lower profitability. The model’s basic problem relies on differentiation, as the prices are charged on the basis of room not on the basis of services being used by the residents.

Moreover, Westmount has allocated the overheads on an evenly basis among every department, despite of departments varying in square footage. The overhead costs must be allocated on the basis of square footage or on the basis of proportion of the company’s total costs to each department.

Alternatives

The key alternatives for the company are:

To allocate the costs on the basis of rooms (suite, one bedroom, and two bedroom) and charging the same price despite of the services rendered.
To use an activity based costing system in determining the supportive services cost to each department, while assigning the overhead to each department and determining the price levels on the basis of service levels (Low, Medium, High), used by the residents.

Alternatives – Evaluation

The alternatives are evaluated on the basis of profitability, appropriate price structures and cost allocation. It is determined that the cost allocation on the basis of rooms results in lower supportive services as compared to the model.Whereby, the cost are allocated on the basis of service levels used by the residents. Additionally, the second alternative would enable the company to assign overhead costs to each department on the basis of the square foot covered, which would ultimately help in assessing the expenditures incurred by each department. Not only this, through second alternative; high costs can be identified easily and appropriate solution can be identified for that particular department. So, the recommended alternative is to use the level of services as measure of assigning the support services costs and square footage to assign the general overhead and admin costs to each department.

Quantitative Analysis

In order to assign the supportive costs; the service levels (Low, Medium, and High) are used. It is observed that 55 patients are expected to acquire low service, 65 have medium medical needs and 40 demand high level of medical services. The number of hours worked by nursing supervisors, nursing attendants and dieticiansare taken by the low, medium and high service takers being determined and multiplied with hourly rate in order to determine the total supervisory costs for the year, i.e. $608130.63 (See Appendix 2). The supervisory cost is calculated on the basis that the levels of services used are greater than the actual costs reported on the basis of rooms, i.e. $538392 (See Appendix 1). The food and laundry costs must also be allocated on the basis of the residents’ usage, but these costs represent small portion of the company’s total costs, so it would be expensive for the company to separate these costs on the basis of service levels used.

In addition to this, the general and administrative overheads are assigned to each department on the basis of square foot coverage (See Appendix 3), as each department has a different size. These adjustments in the costs of supportive service and allocation of overheads to each department resulted in a higher total cost, i.e. $2535738 (See Appendix 4) as compared to previously recorded total cost of $2465999.

Afterwards, a base cost is determined through all other departments by dividing the costs of all the departments (except supportive services) with the total number of residents, and then adding the supervisory cost per resident calculated on the basis of service levels used. In this way, the annual prices of residents are determined on the basis of service levels used (See Appendix 5). The adjusted price levels are used to determine the company’s net profitability, which gives a higher net income of $1197298 (See Appendix 6) as compared to the net profitability on the basis of prices being charged on rooms.

Conclusion

On the basis of detailed analysis; it is recommended that the costs must be assigned on the basis of service levels used by the residents and the overheads should not be evenly allocated to each department, as the departments vary in square foot area coverage. This would enable the company to allocate appropriate costs to each department and to determine appropriate prices to be charged from the customers on the basis of their consumption of Westmount’s services, ultimately resulting in higher profitability.......................

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