Dallas Health Network Proposal :

Background: Dallas Health Network, a subsidiary of Dallas Health System, consists of five medical group practices with three locations. Theyre considering implementing ultrasound services at their locations.

Two Alternatives:

1. Alternative 1: Purchase an ultrasound machine for each of the three Network locations, with a technician traveling between locations.

Cost: 3 ultrasound machines at $100,000 each = $300,000.

2. Alternative 2: Purchase one ultrasound machine mounted in a van that travels between locations.

Cost: 1 ultrasound machine ($100,000) + van ($40,000) = $140,000. This also has the additional operating cost for the van.

Analysis Requirements:

Use Activity-Based Costing (ABC) to detail the costs associated with each activity.

Estimate costs on a per-procedure basis and an annual basis.

Consider qualitative factors before final recommendation.

Assumption: Operating costs remain constant over the equipments useful life.

Additional Costs & Considerations:

Annual van maintenance: $1,000.

Ultrasound machine maintenance under Alternative 1: $1,000 per machine.

Ultrasound machine maintenance under Alternative 2: $1,500 due to more wear and tear.

Potential discount for purchasing three machines: ~5%.

Assumed asset lifespan: 5 years for both ultrasound machines and van.

Sensitivity Analysis: CFO wants the task force to perform sensitivity analyses on certain cost inputs that are seen as uncertain, such as supplies cost, billing and collection cost, etc. He also wants to consider different lifespans for the equipment (3 to 7 years) and the impact of purchase discounts.

The Dallas Health Network is evaluating two options for introducing ultrasound services across its three locations. The decision will be based on costs, and a detailed Activity-Based Costing approach is being used to determine the most economical option.

Questions:

You are the Chair of Dallas Health's ad hoc Task Force. Your job is to evaluate both of the alternatives that are presented in the case above.

1. Please make a recommendation as to which alternative (#1 or #2) you would like to accept. (Your decision needs to be only based on the decision of costs. The cost of the two alternatives must be estimated on a per procedure / annual basis. Please also consider any relative, qualitative factors before making your recommendation).

2. Please determine what would happen to the cost estimates if the useful life of the capital equipment were as short as 3 year or as long as 7 years.

3. If there was a purchase discount, would that have an impact on the overall decision that you would make?

1. Appointment scheduling 2. Patient check-in 3. Ultrasound testing 4. Patient check-out 5. Film processing 6. Film reading 7. Billing and collection 8. General administration 9. Transportation, setup, and breakdown (Alternative 2 only) EXHIBIT 8.1 Dallas Health Network: Activities Associated with Alternatives 1 and 2 Notes: 1. Physician time for testing ( 15 minutes) is needed for one of every ten patients. 2. Supplies consist of linen, probe cover, gel, film, and print paper. 3. There are no radiologists in the Network. Films will be read by the hospital's radiologists at a contract fee of \\( \\$ 40 \\) per procedure. 4. Billing and collection costs are based on an average cost per medical services bill. 5. General administration costs are based on an estimate of facilities and other administrative costs. 6. Transportation, setup, and breakdown are based on ten procedures per day and include vehicle operating costs, excluding maintenance