CASE 6 BIG BEND MEDICAL CENTER: Cost Allocation Concepts 12/1/2017 Copyright 2018 Foundation of the American College of Healthcare Executives. Not for sale. Model, Instructor Version This case focuses on cost allocation concepts, specifically the fairness and incentives created by a new allocation system applied to a department that is moving to a new, stand-alone facility. The primary thrust of the case is qualitative rather than quantitative, but this model can be used to compare results under alternative allocation schemes. The model consists of a complete base case analysis--no changes need to be made to the existing MODEL-GENERATED DATA section. However, values in the INPUT DATA section of the student spreadsheet have been replaced by zeros. Students must select appropriate input values and enter them into the cells with values colored red. After this is done, any error cells will be corrected and the base case solution will appear. The KEY OUTPUT section includes the most important output from the MODEL-GENERATED DATA section. INPUT DATA: KEY OUTPUT: Dialysis Center Data: Dialysis Ctr Outpatient Ctr Total Revenues: Facilities allocation ($) $ 300,000 $ 1,600,000 $ 1,900,000 Hemodialysis program $ 1,300,000 Per square foot $ 15.00 $ 16.00 $ 15.83 Peritoneal program 600,000 Gen overhead alloc. 270,000 2,000,000 2,270,000 Pharmaceutical supplies 800,000 Per revenue $ 10.0% 10.0% 10.0% Total revenues $ 2,700,000 Total indirect costs $ 570,000 $ 3,600,000 $ 4,170,000 Direct expenses: Salaries and benefits $ 900,000 Net profit $ 30,000 $ 4,108,556 $ 4,138,556 Pharmaceutical supplies 800,000 Other supplies 100,000 Percent of rev 1.1% 20.5% 18.2% Utilities 80,000 Equipment lease expense 120,000 Other expenses 100,000 Total direct expenses $ 2,100,000 Net gain (loss) before indirect expenses $ 600,000 Indirect (overhead) expenses: Facilities costs $ 300,000 General overhead 270,000 Total overhead costs $ 570,000 Net profit $ 30,000 MODEL-GENERATED DATA: P&L Statements: Revenues/Direct Costs Without Expansion Initial Allocation Final Allocation DC OC DC OC DC OC Total revenues $ 2,700,000 $ 16,000,000 $ 2,700,000 $ 20,000,000 $ 2,700,000 $ 20,000,000 Direct expenses: 2,100,000 9,833,155 2,100,000 12,291,444 2,100,000 12,291,444 Contribution margin* $ 600,000 $ 6,166,845 $ 600,000 $ 7,708,556 $ 600,000 $ 7,708,556 Percent of revenues 22.2% 38.5% 22.2% 38.5% 22.2% 38.5% Indirect costs Facilities costs $ 300,000 $ 1,200,000 $ 400,000 $ 1,500,000 $ 300,000 $ 1,600,000 General overhead 270,000 1,600,000 270,000 2,000,000 270,000 2,000,000 Total overhead $ 570,000 $ 2,800,000 $ 670,000 $ 3,500,000 $ 570,000 $ 3,600,000 Net profit $ 30,000 $ 3,366,845 $ (70,000) $ 4,208,556 $ 30,000 $ 4,108,556 Percent of revenues 1.1% 21.0% -2.6% 21.0% 1.1% 20.5% Facilities Cost Allocation: Square footage 20,000 80,00020,000 20,000 100,000 20,000 100,000 Cost per square foot $ 15.00 $ 15.00$20.00 $ 20.00 $ 15.00 $ 15.00 $ 16.00 General Overhead Allocation: General overhead as a percent of revenues 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% *Note: The term contribution margin as used here means the amount available to cover overhead costs as opposed to the more traditional meaning of the amount available to cover fixed costs. END Note that the indirect expense values in Rows 40 and 41 must be changed by hand to reflect any changes to the dollar amounts allocated