1. You first are curious about what the projected net income would be for both the routine care and orthopedics departments after the move. You know this move may have a big impact on your bonus. Using Table 18-6 and Table 18-7 expansion allocation 1, allocate the indirect expenses to both the routine care and orthopedic care departments. Once allocated, you will be able to determine the projected net income for both departments.

2. Interpreting the results from question 1, do you think the cost allocation method of using revenue as a cost driver is a fair allocation method? Why or why not?

3. Again, using Table 18-6 and Table 18-7, allocate the indirect expenses based on the square-footage after the expansion. (Routine Care = 50,000 SqFt and Orthopedics = 25,000 SqFt).

4. Now interpret the results from question 3. Is this a fair allocation method? Why or why not?

The construction cost of the new building is estimated to be $100 per square foot. This brings the cost of construction to $100 x 25,000 = $2,500,000. There will be an additional cost of $1,250,000 for items such as equipment, furniture, and relocation costs. This brings the total move cost to the orthopedic department to $2,500,000 + $1,250,000 = $3,750,000. TABLE 18.6 shows the estimated new revenues and expenses for both departments once the move is completed. Because We Care Medical Center is a nonprofit and serves the community, the hospital was able to obtain a no-interest economic development loan which will be paid back in equal payments of $187.500 over the course of 20 years. TABLE 18-6 We Care Medical Center Statements of Revenue and Expenditures Allocation Rates Determination Revenues Routine care $2,650,000 50,000 SqFt Orthopedics $1,550,000 25,000 SqFt Total revenue $4,200,000 75,000 SqFt Direct Expense Salaries and benefits $2.731,500 Supplies $627,300 Total direct expenses $3,358,800 Allocation Rate 1 Allocation Rate 2 Indirect Expenses Facilities expense $504,000 $ 0.12 $6.72 "General overhead $ 210,000 $ 0.05 $ 2.80 Total indirect expenses $ 714,000 Net income $ 127,200 The hospital is considering using the revenue allocation method and the square footage allocation method for the new building. The rates are shown in Table 18-6, with the calculations under the revenue method show as Allocation Rate 1 and the square footage method shown as Allocation Rate 2. The results of the two allocation rates for the expansion are shown in TABLE 18.7. TABLE 18-7 We Care Medical Center Statements of Revenue and Expenditures Under Various Allocation Methods Allocations Without Expansion Expansion Allocations 1 Alternative Expansion Allocations 2 Routine Care Orthopedics Routine Care Orthopedics Routine Care Orthopedics Revenues $2,050,000 $1,301,000 $2,650,000 $1,550,000 $2,650,000 $1,550,000 Direct Expenses Salaries and benefits $1,350,000 $900,000 $1,687,500 $1,044,000 $1,687,500 $1,044,000 Supplies $300,000 $204,000 $382,500 $244,800 $382,500 $244,800 Total direct expenses $1,656,000 $1,104,000 $2,070,000 $1,288,800 $2,070,000 $1,288,800 Indirect Expenses Facilities expense $205,000 $130,100 $318,000 $186,000 $336,000 $168,000 *General overhead $102,500 $65,050 $132,500 $77,500 $140,000 $70,000 Total indirect expenses $307,500 $195,150 $450,500 $263,500 $476,000 $238,000 Net Income $86,500 $1,850 $129,500 ($2,300) $104,000 $23,200 *Accounting, human resources, & technology support