Clearly, the only truly variable expenses are the medical supplies, but if were to find out how were doing, we need to know both physician and extender costs for the different visit types. If we use straight salaries, and essentially treat the providers as fixed costs, we wont be able to do that. So I need to compute per-minute rates for both physicians and extenders, and then multiply those rates by the number of minutes that each provider type spends for each visit type. As I look at this, it all seems pretty daunting, and its not something that Gordon has done before either, so were $ both struggling a little. Medical supplies, on the other hand, are pretty easy. They include a wide variety of disposable items that we use in conjunction with a visit. To keep the budget simple, weve decided to measure them in terms of units, and Gordon has computed an average cost per unit. We just need to multiply those out to get the budget for each visit type. The groups fixed expenses included rent, cleaning, administrative staff, receptionists, office supplies, and similar items, which Dr. King expected to total $300,000 for the year. Allocated over-head was for a variety of administrative services provided by Coos Bay, such as billing, collections,and information services. Coos Bays CFO had told Dr. King that he thought the allocations would total about $250,000, but since they were based on the formulas from Coos Bays full cost allocation system, he could not be completely certain.

The Current Years Budget

The elements of the current years budget that Dr. King and Mr. Hawkins had developed are shown in Exhibit 1. This exhibit contains the anticipated revenue for each visit type, the anticipated Provider time and medical supply units per visit, and the corresponding unit variable expense figures. Dr. King commented:

I think were almost there. We now need to calculate the total variable expense per visit for each visit type, multiply the revenue and total variable expense per visit by the anticipated number of visits to give total revenue and total variable expenses by visit type, deduct the latter from the former to get the contribution to fixed expenses from each visit type, and finally, deduct our anticipated fixed expenses and allocated over-head from the total contribution to give our total budgeted surplus for the year.

Assignment

1.Using the information contained in the case and Exhibit 1, prepare a budget for BMA for the four visit types shown. Use the approach suggested by Dr. King at the end of the case, and organize your figures so that she will find them understandable and useful.

* Assuming Dr. King is unhappy with the bottom line of this budget, what options are available to change it? Which options seem the most feasible to implement?

3. What problems do you think Dr. King will encounter in attempting to implement this budget? What should be done about those problems?

*Try to set up a spreadsheet to calculate the budget. Make it as formula-driven as possible. This will allow you to easily test assumptions in answering Question 2.

Brandon Medical Associates (A)

Exhibit 1. Budget data

Type of Visit	Expected number of visits	Expected Revenue per visit	Expected Physician time per visit	Expected Extender time per visit	Expected Medical Supplies per visit
Initial consultation	3,000	$150	60	15	3
Routine physical	4,000	$110	45	10	2
Intensive visit	6,000	$80	20	10	2
Routine visit	6,000	$60	10	15	1

NOTES:

In minutes at $1.35 per minute.

In minutes at $0.90 per minute.

In units at $4.00 per unit