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CASE 6-1 EASTSIDE MEDICAL TESTING CLO 21 Eastside Medical Testing performs five different tests Before responding to Worthis letter, Emmet reviewed the reve- (1- 50 to detect drug use. Most dients are referred cost data presented in the table below As indicated. Ti company by potential to the nue and was much higher than and costs related to employers who pay for the tests. Revenue produced profit of s590 per test which since detailed in the the tests, for the most recent fiscal year are the per test of any of the other procedures. However tablebelow. a continuing education course at Cty College Setting up equipment to conduct a test is the of (titled ABC and Managing by the Right Numbers). Emmet has three highly skilled technicians, responsibility wondered whether the profitability of tests is being distorted by founder and owner of the one of whom is Wilson. volume tests that are company. Tests T2 to T5 are the company's simple approach toallocatingoverheadowerhead Thus, for example, conducted in batches of 100 tests per batch. allocation is based on direct labor cost. Direct labor consists of annually process Ts is run approximately three times a day to wages and benefits paid to relatively unskilled technicians who tively low 92,000 tests in 920 batches. T1 is a test with rela- prepare samples for testing This cost, S325650,isonly96percent per 7ear), demand. However, itis run almost day (350 runs of total overhead. With help from his bookkeeper, Emmet began ers. This so that results can be quickly communicated to employ- to analyze overhead costs in an attempt to caculate the ABC cost vantage fist turnaround represents asignificant competitive ad- of the five tests. Inthe past year, overheadamounted to$3.386760. for the company. Nuclear Systems, Inc. is one of thefew companies that requires TI ladeed, it accounted for almost half of TI tests con- ducted in the past year. Recently, Ron Worth, vice president ofop 925760 at Nuclear Systems, questioned the relatively high price cations being charged for Ti. In aletter to EmmetWilson henoted: We pays35 for each Titest, which is about 40% higher than your next most expensive test. Is this charge warranted? Frankly, this isnt 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 that requires the test, and you are one of the few companies that provide we believed that the high price was justified in terms Emmets analysis of these six overhead cost categories of significantly higher costs, we would not be writing this letter. Profitability of Tests for the Fiscal Year Ending December 31, 2017 T4 Number of tests per year 3,500 3.310 Number of runs 350 520 21.00 Price per test 22.00 26.00 35.00 10.50 12.00 1.100 1.10 labor at$18per 1.50 overhead at$10.40 per labor hour 15.600 1.10 100 1144 11.44 11.44 10.40 Total cost 19.89 21.90 29.10 5.90 4.10 1.96 1.11 s 1.62 Profit Per test $20,650 213.200 $141,120 s 88,800 148,120 611,890 $54,600 $540,8000 $823680 $915,200 $1.052.480 $3386760 5,250 52,000 79.200 88.000 101.200 325.650 Total overhead Total labor