SUGGESTED SOLUTIONS TO CASE QUESTIONS

students should:

1. Identify the various elements needed to conduct CVP analyses,

2. Describe the cost structure of a service company,

3. Apply CVP analysis in a multiproduct situation and for a special-order decision,

4. Analyze decisions based on the outcome of CVP analyses, and

5. Integrate nonpecuniary into business decision making.

1. Identify and compute the various types of cost for the company according to cost behavior. You are required to

determine the monthly fixed and variable costs for scan and lab services that the company incurs.

From the case, GEO Medical Laboratory incurs both fixed and variable costs. The fixed costs include the

depreciation of the laboratory and scan equipment and furniture. Because of the agreement between GEO

Medical laboratory and the healthcare facility, rent will not be included as part of the fixed costs of the

company. In addition, the salaries of the employees, with the exception of the ultrasonographers, can be

considered fixed costs. This is because the salaries are paid regardless of whether there are clients. The

variable costs of the company are the costs of consumables and the compensation for ultrasonographers.

Because GEO Medical laboratory has an agreement with the health facility, the cost of utilities is not included in

the variable costs. The calculations of the monthly fixed and variable costs are provided in Tables TN-1a and

TN-1b.

2. Assume that GEO Medical Laboratory only provides scan services, and determine the breakeven in terms of units

and sales. If the only services that GEO Medical Laboratory offers are lab services, determine the number of patients

that the company would need to help in order to break even, as well as the break-even amount. Assume that the

salary of the administrative assistant is evenly distributed between the two services and the usage of furniture and

fittings, computer, and printer are equally shared. What does your answer imply?

3. Determine the cost structure of GEO Medical Laboratory. Is the company highly or lowly leveraged?

4. Assuming a multiproduct situation, how many patients and how much total revenue does GEO Medical

Laboratory need to break even in a month?

5. How many patients must GEO Medical Laboratory attend to in a month if it wants to make a profit of US$3,000?

How many of these patients should be scheduled for lab services and how many for scan services?

6. Determine the amount of revenue that GEO Medical has to generate in a month to earn an operating profit of

US$3000. How much of this revenue will be generated from lab and scan services, respectively?

7. Based on quantitative calculations should Wallas accept the schools offer? Why or why not?

Please answer very carefully the above, and you should :

1. Write a one-page management summary of your recommendations to improve the

profitability of GEO Medical Laboratories.

2. Include a copy of your calculations for the first seven questions.

3. Write a separate page of explanations where you clarify your calculation

Table TN-1a. Monthly Fixed Costs Item Total cost Lab technicians' salaries $400.00 Administrative assistant's salary 125.00 Depreciation of computer and printer 15.00 Depreciation of furniture/fittings 21.00 Total Fixed Costs $947.67 Note: All costs are calculated in US dollars. Scan $0.00 62.50 7.50 10.50 $230.50 Lab $400.00 62.50 7.50 10.50 $717.17 Table TN-1b. Monthly Variable Costs Cost per Scan Patient $0.02 Cost per Lab Patient $0.02 0.02 0.06 0.02 0.02 0.02 1.25 0.10 Cost per Cost per Item month patient A4 paper $5.00 $0.02 Alcohol 2.50 0.02 Bandages 7.50 0.06 Cotton 250 0.02 Envelopes 6.00 0.02 Gel 225.00 Gloves 30.00 0.10 Reagents 150.00 Syringes 15.00 Test kits 150.00 125 Test tubes 37.50 0.31 Thermal paper 450.00 2.50 Tissues 5.00 0.03 Toners 16.67 0.06 Ultrasonographers' pay 9720 0.54 Total Variable Costs $1,199.87 $7.55 Note: All costs are calculated in US dollars. 2.50 0.03 0.06 0.54 $4.52 0.06 $3.24 Table TN-1a. Monthly Fixed Costs Item Total cost Lab technicians' salaries $400.00 Administrative assistant's salary 125.00 Depreciation of computer and printer 15.00 Depreciation of furniture/fittings 21.00 Total Fixed Costs $947.67 Note: All costs are calculated in US dollars. Scan $0.00 62.50 7.50 10.50 $230.50 Lab $400.00 62.50 7.50 10.50 $717.17 Table TN-1b. Monthly Variable Costs Cost per Scan Patient $0.02 Cost per Lab Patient $0.02 0.02 0.06 0.02 0.02 0.02 1.25 0.10 Cost per Cost per Item month patient A4 paper $5.00 $0.02 Alcohol 2.50 0.02 Bandages 7.50 0.06 Cotton 250 0.02 Envelopes 6.00 0.02 Gel 225.00 Gloves 30.00 0.10 Reagents 150.00 Syringes 15.00 Test kits 150.00 125 Test tubes 37.50 0.31 Thermal paper 450.00 2.50 Tissues 5.00 0.03 Toners 16.67 0.06 Ultrasonographers' pay 9720 0.54 Total Variable Costs $1,199.87 $7.55 Note: All costs are calculated in US dollars. 2.50 0.03 0.06 0.54 $4.52 0.06 $3.24