Case:

Question 1:

Present a costing model where the cost object is one treatment in the Annual Health Check Program. You may treat the costs of the tests performed by the Medical Support Department as variable costs and the remaining costs as fixed. Comment on the product's profitability.

Question 1b: Calculate the costs of excess capacity in the General Health Care Department, with regards to the Annual Health Check Program. Discuss what Empatica Medical Centre Ltd. could do to reduce these costs.

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Empatica's marketing team was recently contacted by the HR Department of the London City-based private banking firm Greedy Paine Wealth Management. They are currently searching for a new supplier of medical services to their 900 employees, and Empatica is now approaching this company with a fixed price offer for membership, including the Annual Health Check Program.

Question 1c:

Assume that Empatica wants this new contract to make a profit contribution of 50 000 and that they assume that 70 per cent of Greedy Paine's employees will use the benefit offered by their employer. What will the fixed contract price be under these assumptions and how will this order have an impact on the future costs of excess capacity?

In London's West-End, you will find the private hospital Empatica Medical Centre, established in 1985. The hospital's five main departments are: - General Health Care - Accident and Emergency (treatment of acute problems) - Surgery and post-operative unit - Medical Support (laboratories, x-ray radiology, cardiology, MR and CT Scanning, pharmacy and various medical equipment) - Administration (management, finance and accounting, ICT, marketing, customer service and customer booking) Empatica offers a wide variety of medical services. In recent years, the profitability of the medical center has dropped, and management has decided to look more into one particular service, the Annual Health Check Program, offered by the General Health Care Department. Empatica Medical Centre has 13,200 members, who pay an annual membership fee of 109.00. This gives them access to the Empatica's doctors and therapists, and the members pay additionally for the various services rendered. Currently, 7,000 of Empatica's clients choose instead to pay 439.00 for their membership and in addition get one annual comprehensive medical check-up. This is the Annual Health Check Program, internally referred to as AHCP. The consulting firm Young \& Moody was recently commissioned to gather relevant information for a cost analysis of this program. Here is a summary of their conclusions: - AHCP should be treated as an internal profit center in Empatica's accounting system, and relevant revenues and costs should be coded and registered so that we can see how this product contributes to the company's financial value creation. - There are nine medical doctors who are involved in this program, all full time. According to their contracts each have signed up to work 160 days per year. - Their average annual salaries including National Insurance Contribution and other social costs are $185000 each. - The average time spent of each consultation is 45 minutes, and with a 15-minute break between patients and a one-hour lunch break, the medical doctor can handle seven patients each per day. - In addition to the 45-minute consultation, the subscribers to the AHCP also get services carried out by the Medical Support Department, such as blood tests and cardiography. These services take on average 30 minutes to render. - The Medical Support Department charges AHCP for the services they carry out, including cost for test equipment and other medical supplies. For 2023 the rate is 65.00 per patient. - AHCP is also charged for a portion of Empatica Medical Centre's costs for the premises. These costs are split according to the actual use of square meters. The budget for 2023 suggests a fixed annual cost for Empatica's premises of totally 1600 000, and AHCP currently uses 400 of a total of 8000 square meters. - AHCP is also charged for administrative costs in the General Health Care Department. The budgeted administrative costs in 2023 is 902400, of which 20 per cent is allocated to AHCP. These costs can also be considered fixed. No other costs are currently allocated to AHCP