Help. Answer correctly.,,

1. Linqal Mission Hospital operates on charity basis. The hospitals board of

directors has recently complained about the increasing size of the cost budget

insisting that the management should cut down on costs.

The major concern of the board is the cost of maintaining patients at the

intensive care unit (ICU).

The following information is available on the operations of the hospital:

1. The average cost of maintaining a patient at the ICU per week is $.

200,000 compared to $. 100,000 per week incurred in maintaining a

patient at the high dependency unit (HDU) and $. 50,000 per week of

maintaining a patient at the general ward (GW).

2. Past information on patients indicates that:

(i) 50% of the patients in ICU at the beginning of the week will

remain in ICU at the end of the week and 50% will be transferred

to HDU by the end of the week.

(ii) 10% of the patients in HDU at the beginning of the week will be

transferred to ICU, 50% will remain in HDU, and 40% will be

transferred to GW.

(iii) 85% of the patients in the GW at the beginning of the week will

remain in GW at the end of the week, 10% will be transferred to

HDU and 5% to ICU.

3. The board of directors believe that the criteria for maintaining patients in

the ICU is too strict and should be relaxed so that only 40% of the patients

in ICU at the beginning of the week remain there at the end of the week

while 60% are transferred to HDU.

4. The staff at the hospital insist that if the proposed criterion is adopted:

(i) 20% of patients in HDU at the beginning of the week will be

transferred to ICU, 50% will remain in HDU while only 30% will

be transferred to GW.

(ii) No changes will be expected in the GW.

5. Past hospital records indicate that the hospital serves an average of 4,000

patients weekly.

Required:

(a) The steady state weekly costs under the current policy. (7

marks)

(b) The steady state weekly costs under the proposed policy. (7

marks)

(c) Advise the board on the best policy. (2 marks)

(d) State the assumptions of the quantitative technique used in solving

problems (a) and (b) above.

(4 marks)

(Total: 20 marks

2.

(a) Highlight the assumptions of cost-volume-profit (C-V-P) analysis, (4

marks)

(b) Dente Club is a charitable organization based in Nairobi. For the last

20 years, the club has held an annual dinner and dance event with the

primary aim of raising funds to help the less fortune members of the

society.

This year, there is concern that an economic recession may adversely

affect the success of the event with a fall in the number of guests

attending and sale of advertising space in the published events

programme.

A study of past experience, current prices and quotations shows that the

following costs and revenues will apply for the event:

Revenue

Dinner and dance

Sale of dinner and dance tickets: $. 5,000 per ticket.

Sale of raffle tickets: $. 800 per ticket.

Photographs: $. 100 per photograph.

Events programmer

Advertising space: $. 70,000 per page.

Costs

Dinner and dance $.

Hire of premises 210,000

Music band and entertainers 840,000

Raffle prizes 790,000

Hire of a photographer 50,000

Food per person (subject to a minimum of 4,000 guests) 2,400

Events programme

A fixed cost of $. 4,000,000 and a variable cost of $. 5,000 per page.

A committee appointed to assess the likely outcome of the event has

come up with the following data from the clubs records:

Number of tickets

sold

Number of past

events

2,500 to 3,500 4

3,501 to 4,500 6

4,501 to 5,500 8

5,501 to 6,500 2

20

Number of events

programme pages

sold

Number of past

events

240 4

320 8

400 6

480 2

20

Required:

(i) The expected profit from the event. (Assume one raffle ticket

and one photograph per attendant). (10

marks)

(ii) Describe how cost-volume-profit (C-V-P) analysis can be applied

in absorption costing. (6 marks)

(Total: 20 marks)