Eastside Medical Testing performs five responding to Worth's letter, Emmet reviewed the reve- (1-T5 to different tests Before below As indicated, TI company by detect drug use. dients are referred to the nue and presented in the table potential and costs related to employers who pay for the tests. Revenue produced a profit of ss90 per test, which was much higher than detailed in the table the tests, for the most recent fiscal year, are the profit per test of any of the other However, below. Setting up equipment a day-long continuing education course at City College three highly skilled to conduct a test is the responsibility of (tided ABC and Managing by the Right Numbers). Emmet has technicians, one of whom is Emmet Wilson, wondered whether the profitability of tests is being distorted by founder and owner of the company. Tests T2 are the company'ssimple approachtoallocatingover volume to T5 high- allocation labor consists of tests that are conducted in batches of 100 tests per batch. is based on direct cost Direct labor Thus, for example, TS is run approximately three times a to paid technicians who annually process92,000 day wages and benefits to relatively unskilled only 9.6 percent tests in 920 batches. TI isatest with rela- prepare samples fortesting This cost, s325650, is tively low demand. However, it nun almost every day (350 runs of total overhead. With help from his bookkeeper, Emmet began per so results can be qu to employ. to analyze overhead costs in an attempt to calculate the ABCcost This fast turnaround represents a significant competitive ad- of the five tests. In the past year,overhead amounted to $3386760. vantage for the company. Nuclear systems, Inc is one ofthe few companies that requires Costs T1. Indeed, it accounted for almost half of the 3,500 TI tests con- ducted in the past year Recently, Ron Worth, vice president ofop- 925,760 erations at Nudear Systems, questioned the relatively high price 1,476,000 being charged for Ti In a letter to Emmet Wilson he noted: We pay S35for each Ti test, which is about 40% higher than your next most expensive test. Is this charge warranted? Frankly, this 160,000 isn't just a matter of dollars and cents. We believe that we are be- ing taken advantage of because we are one of the few companies $3,386,760 that requires the test, and you are one of the few companies that provide it. we believed that the high price was justified in terms Emmet's analysis of these six overhead cost categories was as of significantly higher costs, we would not be writing this letter. Profitability of Tests for the Fiscal Year Ending December 31, 2017 T4. T2 T1 52,000 3,500 Number of tests per year 3,310 Number of runs 21.00 22.00 26.000 35.00 Price per test 7.35 7.50 10.50 12.00 Material cost 1.10 1.10 1.10 1.00 Direct labor at $18 per hour 1.500 11.44 1144 11.44 overhead at $10.40 per labor hour 10.40 15.60 18.39 19.89 21.90 Total cost 29.10 5.90 4.10 1.96 1.11 1.62 611,890 $20,650 s 213,200 $141,120 s 88,800 148,120 $3,386,760 $54,600 $540,8000 $823,680 $915,200 $1,052,480 s 325,650 5,250 52,000 79.200 88,000 101.200 Profit per test Total overhead Total labor