INPUT DATA: KEY OUTPUT: Dialysis Center Data: Dialysis Ctr S $ s Facilities allocation (5) Per square foot Gen overhead alloc. Per revenue $ Total indirect costs Outpatient Ctr Total $ 1,900,000 $ 1,900,000 $ 19.00 $ 15.83 2,270,000 2,270,000 11.4% 11.4% $ 4,170,000 $4,170,000 #DIV/0! $ $ $ Net profit $ $ 3,538,556 $ 3,538,556 Percentage of revenue #DIV/0! 17.7% 17.7% Revenues Hemodialysis program Peritoneal program Pharmaceutical supplies Total revenues Direct expenses: Salaries and benefits Pharmaceutical supplies Other supplies Utilities Equipment lease expense Other expenses Total direct expenses Net gain (loss) before indirect expenses Indirect (overhead) expenses: Facilities costs General overhead Total overhead costs $ S Note that the indirect expense values in Rows 40 and 41 must be changed by hand to reflect any changes to the dollar amounts allocated. $ Net profit 's P&L Statements: Revenues/Direct Costs $ Total revenues Direct expenses: Contribution margin Percentage of revenues Without Expansion DC OC $ 2,700,000 $ 16,000,000 2,100,000 9,833,155 S 600,000 $ 6,166,845 22.2% 38.5% Initial Allocation DC OC $ 2,700,000 $ 20,000,000 2,100,000 12,291,444 s 600,000 $ 7,708,556 22.2% 38.5% Final Allocation DC OC $ 20,000,000 0 12.291,444 $ 7,708,556 #DIV/0! 38.5% S Indirect costs $ S $ Facilities costs General overhead Total overhead 300,000 $ 1,200,000 270,000 1,600,000 570,000 $ 2,800,000 400,000 $1,500,000 270,000 2,000,000 670,000 $ 3,500,000 $ 1,900,000 2.270,000 $ 4,170,000 S S S S s s Net profit Percentage of revenues 30,000 S 3,366,845 1.1% 21.0% (70,000) S 4,208,556 -2.6% 21.0% $ 3,538,556 17.7% #DIV/0! Facilities Cost Allocation: 20,000 Square footage Cost per square foot 20,000 15.00 $ 80,000 15.00 20,000 20.00 $ 100,000 15.00 100,000 19.00 $ S $ $ Other Overhead Allocation: General overhead as a percentage of revenues 10.0% 10.0% 10.0% 10.0% #DIV/0! 11.4% *Note: The term contribution margin as used here means the amount available to cover overhead costs as opposed to the more traditional meaning of the amount available to cover fixed costs. Question 1 Is it "fair" for the Dialysis Center to suffer in profitability and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space? Question 2 In the past, the medical center has aggregated all facilities costs and then allocated the total amount on the basis of square footage. This methodology assigns an average cost rate to each patient service department regardless of whether its space is new or old, prime or poor. The proposed allocation for the Dialysis Center, on the other hand, requires it to bear the true facilities costs of its new space. What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme? Question 3 If the new allocation method for facilities costs is implemented, what should be the facilities allocation to the Dialysis Center in 20 years, when the loan (which is the basis for the higher cost allocation) has been paid off and there are no longer any actual facilities costs? Question 4 Explain how the revenue from medical (pharmacy) supplies is currently handled for profit and loss reporting purposes. Is there a problem with the current system? Is there a better way of reporting this revenue? If so, what is it? Question 5 When all issues related to the decision are considered, what is your recommendation regarding the final allocation amounts? Question 6 In your opinion, what are three key learning points from this case? INPUT DATA: KEY OUTPUT: Dialysis Center Data: Dialysis Ctr S $ s Facilities allocation (5) Per square foot Gen overhead alloc. Per revenue $ Total indirect costs Outpatient Ctr Total $ 1,900,000 $ 1,900,000 $ 19.00 $ 15.83 2,270,000 2,270,000 11.4% 11.4% $ 4,170,000 $4,170,000 #DIV/0! $ $ $ Net profit $ $ 3,538,556 $ 3,538,556 Percentage of revenue #DIV/0! 17.7% 17.7% Revenues Hemodialysis program Peritoneal program Pharmaceutical supplies Total revenues Direct expenses: Salaries and benefits Pharmaceutical supplies Other supplies Utilities Equipment lease expense Other expenses Total direct expenses Net gain (loss) before indirect expenses Indirect (overhead) expenses: Facilities costs General overhead Total overhead costs $ S Note that the indirect expense values in Rows 40 and 41 must be changed by hand to reflect any changes to the dollar amounts allocated. $ Net profit 's P&L Statements: Revenues/Direct Costs $ Total revenues Direct expenses: Contribution margin Percentage of revenues Without Expansion DC OC $ 2,700,000 $ 16,000,000 2,100,000 9,833,155 S 600,000 $ 6,166,845 22.2% 38.5% Initial Allocation DC OC $ 2,700,000 $ 20,000,000 2,100,000 12,291,444 s 600,000 $ 7,708,556 22.2% 38.5% Final Allocation DC OC $ 20,000,000 0 12.291,444 $ 7,708,556 #DIV/0! 38.5% S Indirect costs $ S $ Facilities costs General overhead Total overhead 300,000 $ 1,200,000 270,000 1,600,000 570,000 $ 2,800,000 400,000 $1,500,000 270,000 2,000,000 670,000 $ 3,500,000 $ 1,900,000 2.270,000 $ 4,170,000 S S S S s s Net profit Percentage of revenues 30,000 S 3,366,845 1.1% 21.0% (70,000) S 4,208,556 -2.6% 21.0% $ 3,538,556 17.7% #DIV/0! Facilities Cost Allocation: 20,000 Square footage Cost per square foot 20,000 15.00 $ 80,000 15.00 20,000 20.00 $ 100,000 15.00 100,000 19.00 $ S $ $ Other Overhead Allocation: General overhead as a percentage of revenues 10.0% 10.0% 10.0% 10.0% #DIV/0! 11.4% *Note: The term contribution margin as used here means the amount available to cover overhead costs as opposed to the more traditional meaning of the amount available to cover fixed costs. Question 1 Is it "fair" for the Dialysis Center to suffer in profitability and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space? Question 2 In the past, the medical center has aggregated all facilities costs and then allocated the total amount on the basis of square footage. This methodology assigns an average cost rate to each patient service department regardless of whether its space is new or old, prime or poor. The proposed allocation for the Dialysis Center, on the other hand, requires it to bear the true facilities costs of its new space. What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme? Question 3 If the new allocation method for facilities costs is implemented, what should be the facilities allocation to the Dialysis Center in 20 years, when the loan (which is the basis for the higher cost allocation) has been paid off and there are no longer any actual facilities costs? Question 4 Explain how the revenue from medical (pharmacy) supplies is currently handled for profit and loss reporting purposes. Is there a problem with the current system? Is there a better way of reporting this revenue? If so, what is it? Question 5 When all issues related to the decision are considered, what is your recommendation regarding the final allocation amounts? Question 6 In your opinion, what are three key learning points from this case