Two Part Question - Please answer entirely.

Part 1

North Metro Dialysis Hospital (NMDH), is a full-service renal dialysis hospital. The hospital provides two types of treatments.

Hemodialysis (HD) requires patients to visit a dialysis hospital three times a week, where they are connected to special, expensive equipment to perform the dialysis.

Peritoneal dialysis (PD) allows patients to administer their own treatment daily at home.

The hospital monitors PD patients and assists them in ordering supplies consumed during the home treatment. Revenue related data for the hospital is in Exhibit 1.

Exhibit 1		Total	HD	PD
Revenues
	Number of patients	164	102	62
	Number of treatments	34967	14343	20624
	Total revenue	$3006775	$1860287	$1146488

NMDHs total costs consist of two categories: Supply Costs and Service Costs. The existing cost system can identify supply costs by type of treatment and in total. These amounts are in Exhibit 2.

Exhibit 2		Total	HD	PD
Revenues
	Standard supplies (drugs, syringes)	$664900	$512619	$152281
	Episodic supplies (for special conditions)	310695	89680	221015
	Total supply costs	$975595	$602299	$373296

For many years, as was the convention in most medical practices, NMDH had not tracked other service costs to particular service products. Rather the service costs, totaling $1,806,151, were allocated to service treatments using the ratio-of-cost-to-charges (RCC) method developed for government cost reimbursement programs. Under RCC, an allocation rate is calculated by dividing service costs by revenue dollars as the allocation base. Then service cost is allocated to product/services by applying the allocation rate to the applicable revenue dollars for each product/service.

Requirement 1

1. Compute an overall service cost allocation rate assuming service costs are allocated based on revenue dollars. Note that this is the ratio-of-cost-to-charges or RCC method.

2. Develop product line (treatment) profit/loss statements showing revenue and cost details.

a. Calculate the profit margin on sales percentage for each service.

b. Using this data evaluate the profitability of these treatments.

Part 2

For many years, hospitals such as NMDH received much of their reimbursement on the basis of reported costs. Starting in the 1980s, however, payment mechanisms increasingly shifted to where now NMDH now received most of its reimbursement on the basis of a fixed fee per patient, not related to the cost of treatment provided. Moreover, because HD and PD procedures were categorized by the government as a single category---dialysis treatment---the weekly reimbursement for each patient was the same: $389.10.

As a consequence, the three HD treatments per week led to a reported revenue per HD treatment of $129.70, and the seven PD treatments per week led to a reported revenue per PD treatment of $55.59.

Management was concerned that average costs under the RCC method did not reasonably reflect the actual cost of these different treatments. Management was also now confronting important decisions about contracting to extend and/or expand their services and change the mix of services provided. They also wanted to consider where process improvements and cost reductions could be made.

In response, the controller at NMDH attempted to implement a more refined costing system. She first decomposed total service costs into two categories:

	Total
Nursing services	$ 883280
General (occupancy and administration costs)	$ 922871
TOTAL	$1806151

Based on HR records and further analysis, nursing services costs were actually comprised of

	Total
Registered nurses (RN's)	$ 239120
Licensed practical nurses (LPN's)	$ 404064
Nursing administration and other staff	$ 240096
TOTAL	$ 883280

Nurses, in collaboration with their administrators, were asked to estimate what percentage of their time was spent on HD versus PD treatments. Based on these percentages, total nursing hours could be decomposed as shown below. Using the nursing hours data, RN and LPN costs could be traced (assigned) to HD and PD service for costing purposes.

	Total hours	HD hours	PD hours
RN's	14000	10000	4000
LPN's	38000	30000	8000

The controller also thought that nursing administration and other staff costs should be treated as an overhead cost pool and allocated to treatments (HD and PD) based on total nursing hours.

Further analysis of the general overhead costs revealed that these costs were comprised of two parts:

Hospital facilities (rent, depreciation, utilities)	$410971
Hospital administration and other support	511900
	$922871

After some thought the controller concluded that the hospital facilities overhead could be allocated based on square feet of space used (22,500 feet for HD and 7,500 feet for PD) and hospital administration and support overhead could be allocated based on the total nursing hours (see data above).

Requirement 2

1. Calculate hourly labor rates for nursing services costs and assign (trace) nursing services (labor) to the two treatment services, HD and PD.

2. Compute the cost allocation rates for

a) Nursing administration and other staff overhead,

b) Hospital facilities overhead, and

c) Hospital administration and other support overhead.

Calculate the total costs for these three costs for HD and PD treatment services.

3. Develop product line (HD and PD treatment services) Profit/Loss statements showing Revenue and Cost details. Calculate the profit margin on sales percentage for each service.

4. Analyze your new product line (treatment services) Profit/Loss and assess its implication of NMDHs managers. Consider what decisions managers might make with this new information and how the decisions made might differ from those derived using the RCC method in Requirement 1 above.