You are the management accountant of Health First $($Pty$)$ Ltd $($Health First$).$ Health

First is a well$-$known private hospital. Health First$$s mission is to deliver quality medical

services to its patients using highly trained staff as well state of the art medical

equipment. In addition to providing medical services to patients, Health First also

started to manufacture a specialised electrical hospital bed, named Easy ZZZ$.$ A

specific department, Department Dream, manufactures the Easy ZZZ beds and each

bed is defined as a unit as an Easy ZZZ bed is the final product sold to customers.

The financial director of Health First approached you with a few questions in

preparation for the upcoming board meeting. You prepared the following information

to answer all his questions:

A$)$ Health First$$s Statement of Profit or Loss for the month of September $2024$:

Number of patients $5000$

Note Rand $000$

Gross patient fees $60000$

Operating costs $58050$

Medical fees $26000$

Nurses$$ salaries $15000$

Administrative salaries $6600$

Medical inventory $5000$

Rent $3800$

Maintenance of medical records $11650$

Net profit $1950$

Note $1$: The maintenance of medical records includes a fixed monthly fee of R$150000$

and a variable charge of R$300$ per patient B$)$ Health First$$s budgeted costing report and international supplier:

The current market demand for the Easy ZZZ beds is $340$ per financial year, and

Department Dream has sufficient operational and non$-$operational capacity to meet

this demand. The market is willing to pay R$9000$ per Easy ZZZ bed.

Easy ZZZ Cost per unit $($R$)$

Direct material $1700$

Direct labour $2200$

Variable manufacturing overheads $370$

Fixed manufacturing overheads $280$

Non$-$manufacturing variable overheads $150$

Non$-$manufacturing fixed overheads $220$

The financial director mentioned to you that the Board is investigating the possibility

of making use of an international supplier to manufacture the Easy ZZZ beds on behalf

of Health First:

$$ The international supplier will charge R$2800$ per Easy ZZZ bed.

$$ By making use of the international supplier the current employees of

Department Dream will become redundant within Health First. A once$-$off

retrenchment fee of R$40000$ in total will be paid to these employees.

$$ The variable manufacturing overheads will be avoidable should the Esay ZZZ

beds$$ production be outsourced, while the non$-$manufacturing variable

overheads will be reduced by R$25000$ over a financial year.

$$ Fixed manufacturing overheads will decrease to R$70100$ per financial year;

however, the non$-$manufacturing fixed overheads will remain as is as they are

largely non$-$dependant on the Esay ZZZ beds. Health First$$s capacity, which

was utilised on Easy ZZZ beds, will initially have no alternative use.REQUIRED:

$1\mathrm{.}1.$ With reference to A$)$ Health First$$s Statement of Profit or Loss for the month

of September $2024$:

$1\mathrm{.}1\mathrm{.}1.$ Classify all the costs in the Statement of Profit or Loss as either variable costs,

fixed costs or mixed costs.

$(6$ marks$)$

$1\mathrm{.}1\mathrm{.}2.$ Prepare a Statement of Profit or Loss for September $2024$ according to the

direct $($marginal costing$)$ approach.

$(10$ marks$)$

$1\mathrm{.}1\mathrm{.}3.$ Calculate the number of patients that Health First must treat in September $2024$

to break even on the assumption that there are no changes in the cost$-$income

ratio.

$(6$ marks$)$

$1\mathrm{.}1\mathrm{.}4.$ Calculate the average fee per patient that must be charged to break even on

the assumption that $5000$ patients can normally be treated within the existing

cost structure of Health First.

$(5$ marks$)$

$1\mathrm{.}2.$ With reference to B$)$ Health First$$s budgeted costing report and

international supplier:

$1\mathrm{.}2\mathrm{.}1.$ Advise the financial director whether it would be more beneficial to continue

manufacturing Easy ZZZ beds during the next financial year or to use the

international supplier.

Support your answer with clearly referenced calculations. $1\mathrm{.}2\mathrm{.}2.$ Assume that Health First decides to outsource the manufacturing of the Easy

ZZZ beds. Describe five $(5)$ risks that could arise from outsourcing and for each

risk, recommend one $(1)$ way to mitigate its impact.