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Case 22: Northwest Suburban Health System NORTHWEST SUBURBAN HEALTH SYSTEM CASE 22 OUTSOURCING DECISIONS NORTHWEST SUBURBAN Health System is a large not-for-profit health- care holding
Case 22: Northwest Suburban Health System
NORTHWEST SUBURBAN HEALTH SYSTEM CASE 22 OUTSOURCING DECISIONS NORTHWEST SUBURBAN Health System is a large not-for-profit health- care holding company that operates both not-for-profit and for-profit subsidiaries in Chicago's (Illinois) northwest suburbs. The not-for-profit subsidiaries consist of four acute care hospitals (Des Plaines General, Arling- ton Heights Memorial, Palatinc General, and Barrington Community) and one service company (SUPPORT). SUPPORT provides various services, such as food, laundry, and medical waste disposal, to the four hospitals. The system's single for-profit subsidiary, PROPERTIES, operates several for-profit businesses, but its primary business line is real estate develop- men--particularly medical office buildings. Northwest Suburban's CEO, Susan Richards, has been thinking about the system's printing situation for some time. The system has a print shop, which currently operates under SUPPORT, that provides some of the print- ing required by the hospitals, but it does not have the capabilities to do all the work required. As shown in exhibit 22.1, Northwest Suburban currently (2017) spends about $830,000 a year on commercial contract printing, some of which could be done in-house if the system expanded its printing capability. Of the roughly $830,000 in total vendor contracts, about $132,000 rep- resents graphics printing-annual reports, brochures, and other promotional material. Most of the graphics printing (about $119,000) could be moved in-house, but about 10 percent of the work (for example, the four-color annual report) would have to continue to be done by outside vendors. Conversely, only about 50 percent of the almost $700,000 in forms printing, or about $349,080, could be moved in-house. Many of the forms require highly specialized equipment, and printing such forms in-house is not cost-effective for businesses, except for very large ones. Northwest Suburban's print contracts (for both graphics and forms) with vendors increased in dollar volume by about 5 percent (2 percent volume increase and 3 percent price increase) from 2016 to 2017, and this trend is expected to continue into the foresccable future. In 2017, the in-house print shop handled $42,837 in hospital billings. (To avoid any potential problems with SUPPORT's not-for-profit status, the print shop currently performs work exclusively for Northwest Suburban's four not-for-profit hospitals.) The print shop bills for materials only, but because material costs represent, on average, 30 percent of commercial ven- dors' total billings, the shop currently does about $42,837/0.30 - $142,790 in annual work on a commercial billing basis. The equipment in the print shop has a current market value of $650,000, and the shop generates about $40,000 in annual depreciation expense for tax purposes. To move 90 percent of the vendor graphics printing and 50 percent of the vendor forms printing in-house, Northwest Suburban would have invest in additional printing equipment. The capital investment necessary for expansion can vary significantly, depending on whether new or used equip- ment is purchased, on the type of main press selected, and on whether only essential or nice-to-have equipment is purchased. Exhibit 22.2 summarizes the equipment capital investment requirements. Note that the old equipment would be retained if the print shop were expanded. The new equipment would also generate tax depreciation of about $25,000 per year, and the required delivery van would cost $2,000 a year to opcrate (in 2017 dollars). The print shop is located in leased space adjacent to Des Plaines Gen- eral, the largest of the four hospitals. The cost of this site is $10 per square foot per year. The print shop occupies 2,000 square feet, and hence current building costs are $20,000 in annual lease payments plus $200 per month in utilities and insurance. Unfortunately, this site cannot be expanded, and hence new space is required if the print shop is to increase its capacity. Suit- able space in a good location can be leased at the same rental rate ($10 per square foot per year), but the new print shop would require 3,500 square feet, increasing the annual lease cost by $35,000 - $20,000 - $15,000. (Assume that lease payments occur at the beginning of cach year.) Furthermore, the new space would require $30,000 in initial remodeling costs and an additional $100 per month in utilities and insurance costs (in 2017 dollars). Note that all leases are negotiated for a five-year period, so lease payments are not affected by inflation, which is expected to average about 3 percent per year. The expanded print shop would require an increase in labor costs of $98,400; these costs are summarized in exhibit 22.3. Labor costs to run the current print shop amount to $50,000 annually, and all current print shop personnel would be retained if the expansion takes place. After discussing the print shop situation with Northwest Suburban's chief financial officer, Susan defined three possible print shop alternatives: 1. Close the print shop completely. Use outside vendors for all printing. 2. Expand the print shop as envisioned. Essentially, this option means expanding the print shop and performing all feasible work in-house. Under this proposal, the shop would remain under SUPPORT and thus would present no tax consequences. 3. Expand the print shop as in Alternative 2. However, all printing activities would be transferred to PROPERTIES. In this situation, capital expenses, such as depreciation and lease payments, would be tax deductible; however, all profits would be taxable. The primary motivation behind this alternative is to permit the print shop to enter the for-profit commercial printing business. Regarding Alternative 1, many outsiders to the hospital industry would be surprised at the amount of outsourcing that takes place. The business of running a hospital is extremely complicated, and many facets of its opera- tions can be more efficiently run by outside companies that specialize in specific functions. The three most common functions that are outsourced (by number of hospitals) are laundry, housekeeping, and clinical/diagnostic equipment maintenance. However, this list goes on and on. In fact, a signifi- cant number of hospitals are now outsourcing some patient care (clinical) services, the most common being anesthesia, emergency department, dialysis, and imaging services. Some hospitals are outsourcing to such a degree that they have created the position of COO-not chief operating officer but chief outsourcing officer. Northwest Suburban's corporate cost of capital, which is dominated by hospital operations, is estimated to be 8.0 percent. However, the system also computes divisional costs of capital for each subsidiary. SUPPORT has access to municipal debt that currently costs about 5.5 percent. Its target capital structure consists of 60 percent debt and 40 percent equity (fund) financing. Because SUPPORT has a captive business relationship with Northwest Suburban's four hospitals, it has relatively low business risk and, consequently, a relatively low cost of equity of 13.0 percent. PROPERTIES cannot issue municipal debt. The bulk of its debt consists of mortgage loans provided by banks and insurance companies. Mortgage debt, which is secured by pledged property, has a relatively low interest rate for taxable debt. Currently, this rate is 7.5 percent. The combined federal- plus-state tax rate of PROPERTIES is 40 percent. Because PROPERTIES competes with other property development companies, its inherent business risk is high, and hence it has a relatively high cost of equity of 17.0 percent. However, its ability to use real estate as collateral for its debt financing gives it a relatively high debt capacity about 75 percent. Northwest Suburban's capital budgeting policy guidelines call for all cash-flow analyses to be restricted to a five-year horizon with zero end-of-project salvage values. The rationale is that estimating cash flows any further into the future is just too difficult. It is now December 2017, and the print shop analysis is due in one week. Thus, for simplicity, assume that all capital investment cash flows, as well as lease payments for 2018, occur at the beginning of 2018 (the end of 2017). Then, the five years of operating flows occur from 2018 through 2022. In addition, Northwest Suburban's capital budgeting policy is to assume that all costs and prices that are not fixed by contract will increase at a 3.0 percent inflation rate. Thus, any 2017 dollar costs must be increased by 3 percent annually beginning in 2018. Furthermore, any 2017 volume amounts must be increased by 2 percent annually, beginning in 2018. In regard to the feasibility of entering the commercial printing business should the print shop be placed into PROPERTIES, Susan discussed the profitability of commercial printing businesses with Mark Stanton, president of the Land of Lincoln Printers Association, the state trade organization. Mark pointed out that the average printer in the United States has a profit margin of 5.5 percent, while the average in the Chicago metropolitan arca is barely 4 percent. Return on assets in the industry is 7.5 percent nationwide and 5.2 percent locally. Estimates regarding the profits that could be earned on commercial printing sales are far from precise, but the best guess is that in 2018 com- mercial sales could bring in as much as $80,000 in pretax profits (in 2018 dollars). This amount could increase to $100,000 in 2019 (in 2019 dollars), given more time to advertise and build customer relationships. Although very uncertain, the pretax profits that stem from external business are expected to increase by 5 percent per year after 2019, including both volume growth and price inflation. Note that the pretax profit amounts include all costs related to the external printing business except marketing costs, which are estimated to be $6,000 in 2018 and are expected to increase at the 3 percent inflation rate. Finally, Northwest Suburban's purchasing manager has questioned the system's policy regarding external printing contracts: What is the current policy, and might a change in policy have a bearing on the decision at hand? The discount rate to use in the analysis has also been an issue under discussion. Susan believes that the discount rate should reflect the divisional placement of the print shop, but some staffers have disagreed with this view, "After all," said one, "the primary factor in choosing a discount rate is the riskiness of the cash flows being discounted." You are the administrative resident at Northwest Suburban and have been given the task of analyzing the feasibility of the print shop and recom- mending a course of action. In assigning the project, your preceptor indicated that a risk analysis was appropriate. When asked for more guidance, his response was, "You know more about this sort of thing than I do. Just do it!" 1 Fiscal Year 2016 2017 Graphics Printing Mercury Universal Color Graphics Windy City Press Northern Illinois Printing Pickett Press Sir Speedy Northwest Suburban Printing C & S Printing Great Lakes Printing Service Total graphics printing $ 85,002 31 16,982.44 9,300.00 5,628.50 3,526.14 1,962.58 85.46 1.161.00 0.00 $ 7,727.86 12,588.00 24,446.00 711.94 2,337.10 8,939.50 0.00 0.00 75,292.83 $123,648.43 $132,043.23 90% to be brought in-house $111,283.59 $118,838.91 Forms Printing Continuous Stock tab Labels Carbon snap Envelopes Lab mount Flat 1/2 side Special Oversize Special service Card stock NCR flat Total forms printing 50% to be brought in-house $223,826,43 77.150.41 68,032.88 97,563.27 61,096.52 5,095.35 42,266.69 39,910.37 1,458.19 1,190.00 21.237.40 21,017.01 $239,493.82 82,550.50 65,965.88 106,283.44 62.435.89 5,126.33 40,986.45 46,295.47 0.00 2,743.98 23,479.11 22.798.19 $659,844.52 $698,159.06 $329,922.26 $349,079.53 Total vendor printing $783,492.95 $830,202.29 Total to be brought in-house $441,205.85 $467,918.44 Item Estimated Cost $ 65,000 26,000 7800 13,000 28,000 5,300 Two-color press Two-color press (small), Model 9860 Ten hole drill press Futura F20 folder system Collator-stitcher, 12 bin Bookmaker, Michael 1000E Camera with processor Paper plate, AB Dick 148 Three knife trimmer Infrared dryer systems (2) Delivery van Miscellaneous items 14,000 11,500 12,000 5,000 25,000 5,000 Total capital investment $217,600 Number Position Annual Salary 1 Lead printer Delivery person Clerical assistant $ 42,000 25,000 15,000 Projected raw-labor expense Plus: 20 percent fringe benefits $ 82,000 16,400 Total annual incremental labor costs $ 98,400 CASE 22 QUESTIONS NORTHWEST SUBURBAN HEALTH SYSTEM Outsourcing Decisions 1. Begin by considering the System's capital costs. Calculate the divisional costs of capital for SUPPORT and PROPERTIES. Compare the corporate and divisional costs of capital and explain why they differ. 2. Consider Alternative 2 (expand the printshop within the SUPPORT subsidiary) (Note: It is best to start with this alternative because it gives an "anchor" discount rate that can be used as the basis for the other two alternatives.) a. What cost of capital should be applied in the analysis? Should it be the corporate cost of capital, one of the divisional costs, or some other discount rate? (Hint: The cash flows being discounted are those associated with printing operations.) b. What is Alternative 2's NPV? 3. Consider Alternative 1 (close the printshop and use outside vendors for all printing). a. What cost of capital should be used in the analysis? (Hint: How does the risk of this alternative compare with that of Alternative 2?) b. What is Alternative 1's NPV? c. Why do the NPV and IRR methods produce conflicting results? Does the MIRR also conflict with the NPV? 4. Consider Alternative 3 (expand the printshop within the PROPERTIES subsidiary). a. What is Alternative 3's NPV without considering any revenues from commercial printing? Compare this value with the NPV of Alternative 2. Do they differ, and if so, why? b. What is Alternative 3's NPV considering the revenues expected from outside buyers of printing services? C. Justify the discount rate(s) applied in Questions 4a and 4b. d. What light does the information on printshop industry profitability shed on the decision? e. What effect would the move to a for-profit business have on printing costs for the System's four not- for-profit hospitals? (Hint: This is a transfer pricing issue.) 5. What does exhibit 22.1 in the case reveal about the System's contracting policy with its printers? Does it appear that printing contracts are controlled centrally? Can you think of any potential ways to reduce vendor printing charges? 6. Discuss the pros and cons of truncating a project's cash flows after five years. Be specific regarding the implications for the three analyses performed in this case. 7. What is your final recommendation concerning the printing situation? 8. In your opinion, what are three key learning points from this case? NORTHWEST SUBURBAN HEALTH SYSTEM CASE 22 OUTSOURCING DECISIONS NORTHWEST SUBURBAN Health System is a large not-for-profit health- care holding company that operates both not-for-profit and for-profit subsidiaries in Chicago's (Illinois) northwest suburbs. The not-for-profit subsidiaries consist of four acute care hospitals (Des Plaines General, Arling- ton Heights Memorial, Palatinc General, and Barrington Community) and one service company (SUPPORT). SUPPORT provides various services, such as food, laundry, and medical waste disposal, to the four hospitals. The system's single for-profit subsidiary, PROPERTIES, operates several for-profit businesses, but its primary business line is real estate develop- men--particularly medical office buildings. Northwest Suburban's CEO, Susan Richards, has been thinking about the system's printing situation for some time. The system has a print shop, which currently operates under SUPPORT, that provides some of the print- ing required by the hospitals, but it does not have the capabilities to do all the work required. As shown in exhibit 22.1, Northwest Suburban currently (2017) spends about $830,000 a year on commercial contract printing, some of which could be done in-house if the system expanded its printing capability. Of the roughly $830,000 in total vendor contracts, about $132,000 rep- resents graphics printing-annual reports, brochures, and other promotional material. Most of the graphics printing (about $119,000) could be moved in-house, but about 10 percent of the work (for example, the four-color annual report) would have to continue to be done by outside vendors. Conversely, only about 50 percent of the almost $700,000 in forms printing, or about $349,080, could be moved in-house. Many of the forms require highly specialized equipment, and printing such forms in-house is not cost-effective for businesses, except for very large ones. Northwest Suburban's print contracts (for both graphics and forms) with vendors increased in dollar volume by about 5 percent (2 percent volume increase and 3 percent price increase) from 2016 to 2017, and this trend is expected to continue into the foresccable future. In 2017, the in-house print shop handled $42,837 in hospital billings. (To avoid any potential problems with SUPPORT's not-for-profit status, the print shop currently performs work exclusively for Northwest Suburban's four not-for-profit hospitals.) The print shop bills for materials only, but because material costs represent, on average, 30 percent of commercial ven- dors' total billings, the shop currently does about $42,837/0.30 - $142,790 in annual work on a commercial billing basis. The equipment in the print shop has a current market value of $650,000, and the shop generates about $40,000 in annual depreciation expense for tax purposes. To move 90 percent of the vendor graphics printing and 50 percent of the vendor forms printing in-house, Northwest Suburban would have invest in additional printing equipment. The capital investment necessary for expansion can vary significantly, depending on whether new or used equip- ment is purchased, on the type of main press selected, and on whether only essential or nice-to-have equipment is purchased. Exhibit 22.2 summarizes the equipment capital investment requirements. Note that the old equipment would be retained if the print shop were expanded. The new equipment would also generate tax depreciation of about $25,000 per year, and the required delivery van would cost $2,000 a year to opcrate (in 2017 dollars). The print shop is located in leased space adjacent to Des Plaines Gen- eral, the largest of the four hospitals. The cost of this site is $10 per square foot per year. The print shop occupies 2,000 square feet, and hence current building costs are $20,000 in annual lease payments plus $200 per month in utilities and insurance. Unfortunately, this site cannot be expanded, and hence new space is required if the print shop is to increase its capacity. Suit- able space in a good location can be leased at the same rental rate ($10 per square foot per year), but the new print shop would require 3,500 square feet, increasing the annual lease cost by $35,000 - $20,000 - $15,000. (Assume that lease payments occur at the beginning of cach year.) Furthermore, the new space would require $30,000 in initial remodeling costs and an additional $100 per month in utilities and insurance costs (in 2017 dollars). Note that all leases are negotiated for a five-year period, so lease payments are not affected by inflation, which is expected to average about 3 percent per year. The expanded print shop would require an increase in labor costs of $98,400; these costs are summarized in exhibit 22.3. Labor costs to run the current print shop amount to $50,000 annually, and all current print shop personnel would be retained if the expansion takes place. After discussing the print shop situation with Northwest Suburban's chief financial officer, Susan defined three possible print shop alternatives: 1. Close the print shop completely. Use outside vendors for all printing. 2. Expand the print shop as envisioned. Essentially, this option means expanding the print shop and performing all feasible work in-house. Under this proposal, the shop would remain under SUPPORT and thus would present no tax consequences. 3. Expand the print shop as in Alternative 2. However, all printing activities would be transferred to PROPERTIES. In this situation, capital expenses, such as depreciation and lease payments, would be tax deductible; however, all profits would be taxable. The primary motivation behind this alternative is to permit the print shop to enter the for-profit commercial printing business. Regarding Alternative 1, many outsiders to the hospital industry would be surprised at the amount of outsourcing that takes place. The business of running a hospital is extremely complicated, and many facets of its opera- tions can be more efficiently run by outside companies that specialize in specific functions. The three most common functions that are outsourced (by number of hospitals) are laundry, housekeeping, and clinical/diagnostic equipment maintenance. However, this list goes on and on. In fact, a signifi- cant number of hospitals are now outsourcing some patient care (clinical) services, the most common being anesthesia, emergency department, dialysis, and imaging services. Some hospitals are outsourcing to such a degree that they have created the position of COO-not chief operating officer but chief outsourcing officer. Northwest Suburban's corporate cost of capital, which is dominated by hospital operations, is estimated to be 8.0 percent. However, the system also computes divisional costs of capital for each subsidiary. SUPPORT has access to municipal debt that currently costs about 5.5 percent. Its target capital structure consists of 60 percent debt and 40 percent equity (fund) financing. Because SUPPORT has a captive business relationship with Northwest Suburban's four hospitals, it has relatively low business risk and, consequently, a relatively low cost of equity of 13.0 percent. PROPERTIES cannot issue municipal debt. The bulk of its debt consists of mortgage loans provided by banks and insurance companies. Mortgage debt, which is secured by pledged property, has a relatively low interest rate for taxable debt. Currently, this rate is 7.5 percent. The combined federal- plus-state tax rate of PROPERTIES is 40 percent. Because PROPERTIES competes with other property development companies, its inherent business risk is high, and hence it has a relatively high cost of equity of 17.0 percent. However, its ability to use real estate as collateral for its debt financing gives it a relatively high debt capacity about 75 percent. Northwest Suburban's capital budgeting policy guidelines call for all cash-flow analyses to be restricted to a five-year horizon with zero end-of-project salvage values. The rationale is that estimating cash flows any further into the future is just too difficult. It is now December 2017, and the print shop analysis is due in one week. Thus, for simplicity, assume that all capital investment cash flows, as well as lease payments for 2018, occur at the beginning of 2018 (the end of 2017). Then, the five years of operating flows occur from 2018 through 2022. In addition, Northwest Suburban's capital budgeting policy is to assume that all costs and prices that are not fixed by contract will increase at a 3.0 percent inflation rate. Thus, any 2017 dollar costs must be increased by 3 percent annually beginning in 2018. Furthermore, any 2017 volume amounts must be increased by 2 percent annually, beginning in 2018. In regard to the feasibility of entering the commercial printing business should the print shop be placed into PROPERTIES, Susan discussed the profitability of commercial printing businesses with Mark Stanton, president of the Land of Lincoln Printers Association, the state trade organization. Mark pointed out that the average printer in the United States has a profit margin of 5.5 percent, while the average in the Chicago metropolitan arca is barely 4 percent. Return on assets in the industry is 7.5 percent nationwide and 5.2 percent locally. Estimates regarding the profits that could be earned on commercial printing sales are far from precise, but the best guess is that in 2018 com- mercial sales could bring in as much as $80,000 in pretax profits (in 2018 dollars). This amount could increase to $100,000 in 2019 (in 2019 dollars), given more time to advertise and build customer relationships. Although very uncertain, the pretax profits that stem from external business are expected to increase by 5 percent per year after 2019, including both volume growth and price inflation. Note that the pretax profit amounts include all costs related to the external printing business except marketing costs, which are estimated to be $6,000 in 2018 and are expected to increase at the 3 percent inflation rate. Finally, Northwest Suburban's purchasing manager has questioned the system's policy regarding external printing contracts: What is the current policy, and might a change in policy have a bearing on the decision at hand? The discount rate to use in the analysis has also been an issue under discussion. Susan believes that the discount rate should reflect the divisional placement of the print shop, but some staffers have disagreed with this view, "After all," said one, "the primary factor in choosing a discount rate is the riskiness of the cash flows being discounted." You are the administrative resident at Northwest Suburban and have been given the task of analyzing the feasibility of the print shop and recom- mending a course of action. In assigning the project, your preceptor indicated that a risk analysis was appropriate. When asked for more guidance, his response was, "You know more about this sort of thing than I do. Just do it!" 1 Fiscal Year 2016 2017 Graphics Printing Mercury Universal Color Graphics Windy City Press Northern Illinois Printing Pickett Press Sir Speedy Northwest Suburban Printing C & S Printing Great Lakes Printing Service Total graphics printing $ 85,002 31 16,982.44 9,300.00 5,628.50 3,526.14 1,962.58 85.46 1.161.00 0.00 $ 7,727.86 12,588.00 24,446.00 711.94 2,337.10 8,939.50 0.00 0.00 75,292.83 $123,648.43 $132,043.23 90% to be brought in-house $111,283.59 $118,838.91 Forms Printing Continuous Stock tab Labels Carbon snap Envelopes Lab mount Flat 1/2 side Special Oversize Special service Card stock NCR flat Total forms printing 50% to be brought in-house $223,826,43 77.150.41 68,032.88 97,563.27 61,096.52 5,095.35 42,266.69 39,910.37 1,458.19 1,190.00 21.237.40 21,017.01 $239,493.82 82,550.50 65,965.88 106,283.44 62.435.89 5,126.33 40,986.45 46,295.47 0.00 2,743.98 23,479.11 22.798.19 $659,844.52 $698,159.06 $329,922.26 $349,079.53 Total vendor printing $783,492.95 $830,202.29 Total to be brought in-house $441,205.85 $467,918.44 Item Estimated Cost $ 65,000 26,000 7800 13,000 28,000 5,300 Two-color press Two-color press (small), Model 9860 Ten hole drill press Futura F20 folder system Collator-stitcher, 12 bin Bookmaker, Michael 1000E Camera with processor Paper plate, AB Dick 148 Three knife trimmer Infrared dryer systems (2) Delivery van Miscellaneous items 14,000 11,500 12,000 5,000 25,000 5,000 Total capital investment $217,600 Number Position Annual Salary 1 Lead printer Delivery person Clerical assistant $ 42,000 25,000 15,000 Projected raw-labor expense Plus: 20 percent fringe benefits $ 82,000 16,400 Total annual incremental labor costs $ 98,400 CASE 22 QUESTIONS NORTHWEST SUBURBAN HEALTH SYSTEM Outsourcing Decisions 1. Begin by considering the System's capital costs. Calculate the divisional costs of capital for SUPPORT and PROPERTIES. Compare the corporate and divisional costs of capital and explain why they differ. 2. Consider Alternative 2 (expand the printshop within the SUPPORT subsidiary) (Note: It is best to start with this alternative because it gives an "anchor" discount rate that can be used as the basis for the other two alternatives.) a. What cost of capital should be applied in the analysis? Should it be the corporate cost of capital, one of the divisional costs, or some other discount rate? (Hint: The cash flows being discounted are those associated with printing operations.) b. What is Alternative 2's NPV? 3. Consider Alternative 1 (close the printshop and use outside vendors for all printing). a. What cost of capital should be used in the analysis? (Hint: How does the risk of this alternative compare with that of Alternative 2?) b. What is Alternative 1's NPV? c. Why do the NPV and IRR methods produce conflicting results? Does the MIRR also conflict with the NPV? 4. Consider Alternative 3 (expand the printshop within the PROPERTIES subsidiary). a. What is Alternative 3's NPV without considering any revenues from commercial printing? Compare this value with the NPV of Alternative 2. Do they differ, and if so, why? b. What is Alternative 3's NPV considering the revenues expected from outside buyers of printing services? C. Justify the discount rate(s) applied in Questions 4a and 4b. d. What light does the information on printshop industry profitability shed on the decision? e. What effect would the move to a for-profit business have on printing costs for the System's four not- for-profit hospitals? (Hint: This is a transfer pricing issue.) 5. What does exhibit 22.1 in the case reveal about the System's contracting policy with its printers? Does it appear that printing contracts are controlled centrally? Can you think of any potential ways to reduce vendor printing charges? 6. Discuss the pros and cons of truncating a project's cash flows after five years. Be specific regarding the implications for the three analyses performed in this case. 7. What is your final recommendation concerning the printing situation? 8. In your opinion, what are three key learning points from this caseStep by Step Solution
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