EXHIBIT 12.10 A COMPARISON OF A CONVENTIONAL AND AN ABC APPROACH TO COSTING THREE SERVICES Givens: overall percentages and totals GA GB GC Visit Type GD GE GE GG Initial Regular Intensive Row Total Overhead Total Total Annual Hours Number of visits 2096 Number of new visits 80% Direct materials (etc.) 10% Direct labor 2096 Intake or referral 7096 Medical records 3096 Billing 5096 Other 3396 Total overhead 50% 10% 30% 30% 10% 4096 2096 33% 30% 1096 6096 50% 2096 30% 3096 33% 100% 100% 100% 100% 100% 100% 100% 100% 10.000 2,500 $50,000 $450,000 15% 15% 30% 40% 100% 2,040 2,040 4,080 $175,000 Basic Data: Total Cost by Visit Type Calculation of Cost: Unit by Visit Type B D E F Initial Regular Intensive Total (Given) (Given) (Given) (A+B+C) Initial Regular Intensive H Cost per Unit Formula Basic data and calculation of unit costs using a conventional approach 2,000 5,000 3,000 $5,000 $15,000 $30,000 $90,000 $135,000 $225,000 1 Number of visits 2 Direct materials (etc.) 3 Direct labor 4 Estimated overhead (total is a given) 5 Cost per visit: conventional method 10,000 $50,000 $2.50 $3.00 $10.00 (Row 2 / Row 1) $450,000 $45.00 $27.00 $75.00 (Row 3 / Row 1) $175,000 $17.50 $17.50 $17.50 (D4/D1) $65.00 $47.50 $102.50 (Sum: Rows 2-4) Dum Rows 2-4 EXHIBIT 12.10 (CONTINUED) (1) Annual projections of overhead costs by activity and cost driver; (2) Unit cost calculations for these overhead vides Cost and Cost Driver Information J L Cost Driver Units Unit Cost Activity (Given) (Given) (Given) (1/K) 1 6 Intake 7 Medical records 8 Billing 9 Other 10 Total $26,250 $26,250 $52,500 $70,000 $175,000 New visits Hours spent Hours spent Visits 2,500 new visits 2,040 hours 4,080 hours 10,000 visits $10.50 per new visit $12.87 per hour $12.87 per hour $7.00 per visit Additional basic data (3) Basic data: actual annual operating results of cost drivers to be used in assigning ABC overhead cost Visit Type M Initial N Regular (Given) o Intensive (Given) Total (M+N+O) (Given) 11 New visits 12 Medical records 13 Billing 14 Other 2,000 612 2,040 2,000 250 816 816 5,000 250 612 1,224 3,000 2,500 2,040 4,080 10,000 (Continued) EXHIBIT 12.10 (CONTINUED) Calculation of total and per visit overhead costs using ABC Visit Type Total 15 New visits 16 Medical records 17 Billing 18 Other 19 Total 20 Per visit Q Initial $21,000 $7,875 $26,250 $14,000 $69,125 $34.56 R Regular $2,625 $10,500 $10,500 $35,000 $58,625 $11.73 Derivation of unit costs using an ABC approach 5 Intensive $2,625 $7,875 $15.750 $21,000 $47.250 $15.75 $26,250 $26,250 $52,500 $70,000 $175,000 $17.50 Formula (25 x Row 11) 7 x Row 129 LB x Row 133 L9 x Row 14 Sum Rows 15-18 Row 19 I Row 1) Unit cost estimates using ABC Visit Type ABC 21 Direct materials 22 Direct labor 23 Overhead 24 Total using ABC V Initial $2.50 $45.00 $34.56 $82.06 w Regular $3.00 $27.00 $11.73 $41.73 Intensive $10.00 $75.00 $15.75 $100.75 Formula (Row 2. cols. E, F, G) (Row 3 cols. E, F, G) (Row 20) (Sum: Rows 21-23) EXHIBIT 72.70 (CONTINUED) Comparison of unit costs: ABC versus conventional Visit Type z Initial AC 25 Total conventional 26 Amount ABC estimate is more (less) than conventional $65.00 $17.06 AA Regular $47.50 ($5.78) AB Intensive $102.50 ($1.75) AD Formula (Row 5, cols. E, F, G) (Row 24 - Row 25) Comparison of total costs: ABC versus conventional Visit Type Total AE Initial AF Regular AG Intensive AH (AE + AF + AG) Formula Comparison of total costs and unit costs: ABC vs. conventional Activity-based costing method 27 Number of visits 28 Direct materials 29 Direct labor 30 Overhead 31 Total ABC 2,000 $5,000 $90,000 $69,125 $164,125 5,000 $15,000 $135,000 $58,625 $208,625 3,000 $30,000 $225,000 $47,250 $302,250 10,000 $50,000 $450,000 $175,000 $675,000 (Row 1) (Row 2) (Row 3) (Row 27 x Row 23) (Sum: Rows 28-30) Conventional method 32 Direct materials 33 Direct labor 34 Overhead 35 Total conventional 36 Amount ABC estimate is more (less) than conventional $5,000 $90,000 $35,000 $130,000 $34,125 $15,000 $135,000 $87,500 $ 237,500 ($28,875) $30,000 $225,000 $52,500 $307,500 ($5,250) $50,000 $450,000 $175,000 $675,000 $0 (Row 2) (Row 3) (Row 27 x Row 5,E,F,G) (Sum: Rows 32-34) (Row 31 - Row 35) Problem I (15 points): Assume that you have completed your degree, and that you will get a job on the next January 1. To help fund your retirement, you plan on investing $2,000 semi-annually (starting 6 months from January 1) in each of the next 25 years at 6%. How much will your account be worth after 25 years? How much would you have in 25 years if the rate was 5% but you made the investment annually starting the day you start the job and continuing on the anniversary of your employment? In I each case you have invested $100,000) Please show how you arrived at your answers. Problem II (20 points): Wecare Hospital just bought a new MRI. This is their first MRI purchase, so that all the revenue and expense attributed to the MRI is new. The unit cost $1,500,000. Net operating cash flows for years 1-5 are as follows: $200,000, $400,000, $500,000, $800,000 and $1,600,000. 1. What is the payback? 2. Determine the NPV using a cost of capital of 15% 3. Determine the NPV using a cost of capital of 20% 4. Should the project be accepted at 15%? At 20%? Please explain your response