Solutions
Project 2 Intro
| Project 2 | Please use this template provided to solve project 2 that contains 2 parts. Save your file using your first initial, last name, and project 2. |
| Name: TYPE in your name here | Upload your solution to the project 2 link. Make sure you type your name in cell A2 |
| You should always verify that your project file has been uploaded correctly. Remember it is your | |
| responsibility to take the time to verify that your file has uploaded correctly. If there are problems, please contact me immediately. | |
| You will be graded on the accuracy of your answer and the usage of excel. | |
| The project solution is worth a total of 30 pts. | |
| Remember to review the eLectures and guided examples in MBC. Also, there is support material on cost-profit-volume analysis in the Module 16 folder and relevant cost analysis in Module 17 folder. | |
| Keep in mind that even though this project focuses on material from Modules 16 and 17, but it is building on the concepts learned in Module 15 on cost behavior. | |
| Project 2 Objectives: | |
| 1. Develop Contribution Income statement. | |
| 2. Develop unit contribution margin. | |
| 3. Perform Breakeven Analysis. | |
| 4. Calculate and analyze operating leverage. | |
| 5. Evaluate and recommend how to plan for increase in patient demand | |
| 6. Evaluating relevant costs for decision making purposes | |
| Grading Rubric: | Points |
| Part 1: | |
| #1 | 3.5 |
| #2 | 2 |
| #3 | 2 |
| #4 | 3 |
| #5 | 2 |
| #6 | 2 |
| #7 | 3.5 |
| #8 | 2 |
| #9 | 4 |
| Part 2: | |
| #1 | 2 |
| #2 | 2 |
| #3 | 2 |
| Total points | 30 |
Project 2 Part 1 Requirements
| Project 2 -Part 1 | ||
| Helping Hospital operates a general hospital but rents space to separately owned entities rendering specialized services such as pediatrics and psychiatry. | ||
| Helping Hospital charges each separate entity for patients’ services (Meals and laundry) and for administrative services (billings and collections). Space and bed rentals are fixed charges for the year, based on bed capacity rented to each entity. | ||
| Helping Hospital charged the following costs to Pediatrics for the year ended June 30, 2019. | ||
| Patient Services | Bed Capacity | |
| (Variable cost) | (Fixed Cost) | |
| Dietary | $560,000 | |
| Janitorial | $70,000 | |
| Laundry | 300,000 | |
| Laboratory | 410,000 | |
| Pharmacy | 300,000 | |
| Repairs and maintenance | 30,000 | |
| General and administrative | 1,300,000 | |
| Rent | 1,500,000 | |
| Billings and collections | 250,000 | |
| Total | $1,820,000 | $2,900,000 |
| In addition to these charges from Helping Hospital, Pediatrics incurred the following personnel costs. | ||
| Annual Salaries—these salaries are fixed | ||
| Supervising nurses | $100,000 | |
| Nurses | 420,000 | |
| Assistants | 180,000 | |
| Total | $700,000 | |
| During the year ended June 30, 2019, Pediatrics charged the following and had the following relevant days: | ||
| $500 | daily charge to patient for services | |
| $6,500,000 | Total Revenues | |
| 36 | Relevant Range of daily beds | |
| Required: Prepare your solution on the Part 1 Solution Worksheet. You must provide cell references to this worksheet to earn credit. | ||
| 1. Prepare a contribution income statement for Pediatrics for the year ended June 30, 2019. | ||
| 2. Calculate the number of patient-days that Pediatrics generated in revenue for the year ended June 30, 2019. | ||
| 3. Compute the contribution margin per patient days generated for the year ended June 30, 2019. | ||
| 4. Calculate the minimum number of patient-days required for Pediatrics to break even for the upcoming year June 30, 2020. Assume that revenue per patient-day, cost per patient-day, | ||
| cost per bed and salary rates for this upcoming year June 30, 2020, remain the same as for the year ended June 30, 2019. | ||
| 5. Calculate the operating leverage ratio. | ||
| 6. If demand for patient days are projected to increase from the 2019 current patient demand in 2020: | 4% | |
| Calculate the increase in income using the operating leverage. | ||
| 7. Prepare a contribution income statement showing the projected 2020 revenue and costs if the demand for patient days increases in 2020 to the projected increase stated in #6. | ||
| 8. Using the profit for end of year June 30, 2019 and June 30, 2020, prove that the change in income between the two years equals the percentage change in #6. | ||
| 9. Recommend to Pediatrics what they should do as the operations grow and have the ability to exceed the current capacity limits that Helping Hospital has put on Pediatrics. | ||
| Include in your response on average how many beds Pediatrics is currently using daily and how much will this increase based on #6 projected increase in 2020. | ||
| Explain why the relevant range is important to know and understand and how it impacts your recommendation. Assume a 365 day year. |
Part 1 Solution
| Solution | ||
| 1. Prepare a contribution income statement for Pediatrics for the year ended June 30, 2019. | ||
| Peidatrics | ||
| Contribution Income statement | ||
| For the year ended June 30, 2019 | ||
| Revenue | $6,500,000 | |
| Less Variable Costs: | ||
| Patient Services | $1,820,000 | |
| Contribution Margin | $4,680,000 | |
| Less Fixed Costs: | ||
| Bed Capacity costs | $2,900,000 | |
| Personnel costs | $700,000 | $3,600,000 |
| Profit | $1,080,000 | |
| 2. Calculate the number of patient-days that Pediatrics generated in revenue for the year ended June 30, 2019. | ||
| 13,000.00 | Patient days | |
| 3. Compute the contribution margin per patient days generated for the year ended June 30, 2019. | ||
| $360.00 | Contribution Margin per patient days | |
| 4. Calculate the minimum number of patient-days required for Pediatrics to break even for the upcoming year June 30, 2020. Assume that revenue per patient-day, cost per patient-day, | ||
| cost per bed and salary rates for this upcoming year June 30, 2020, remain the same as for the year ended June 30, 2019. | ||
| 10,000.00 | Patient days | |
| 5. Calculate the operating leverage ratio. | ||
| 4.3333333333 | Operating leverage ratio | |
| 6. Calculate the increase in income using the operating leverage. | ||
| 17.33% | Increase income using the operating leverage | |
| 7. Prepare a contribution income statement showing the projected 2020 revenue and costs if the demand for patient days increases in 2020 to the projected increase stated in #6. | ||
| Pediatrics | ||
| Contribution Income statement | ||
| For the year ended June 30, 2020 | ||
| Revenue | $6,760,000 | |
| Less Variable Costs: | ||
| Patient Services | $1,892,800 | |
| Contribution Margin | $4,867,200 | |
| Less Fixed Costs: | ||
| Bed Capacity costs | $2,900,000 | |
| Personnel costs | $700,000 | $3,600,000 |
| Profit | $1,267,200 | |
| 8. Using the profit for end of year June 30, 2019 and June 30, 2020, prove that the change in income between the two years equals the percentage change in #6. | ||
| 17.33% | Percentage increase in income between the two years | |
| 9. Recommend to Pediatrics what they should do as the operations grow and have the ability to exceed the current capacity limits that Helping Hospital has put on Pediatrics. | ||
| Include in your response on average how many beds Pediatrics is currently using and how much will this increase based on #6 projected increase in 2020. | ||
| Explain why the relevant range is important to know and understand and how it impacts your recommendation. Assume a 365 day year. | ||
| Pediatrics needs to look for additional bed capacity, since currently the capacity is set at 60 beds per day at Helping Hospital. Pediatrics should be | ||
| proactive and see if Helping Hands would increase the bed capacity. | ||
| In 2019 Pediatrics used 13,000/365 days=35.61 or 36 beds on average daily during the year. In 2020, this will increase 35.61*1.04=37 beds on average during 2020. | ||
| Pediatrics will exceed the relevant range in 2020 of 36 daily beds. | ||
| Relevant range is important, since fixed costs stays the same within the relevant range. | ||
| Therefore, Pediatrics fixed costs will increase , since the fixed costs are based on the usage up to 36 beds a day. |
Part 2
| Part 2 contains 3 Decision making recommendations that are independent of each other. This part covers material in Module 17. | ||
| Decision Making #1-Special Order | ||
| Snider, Inc., which has excess capacity, received a special order for 3,000 units at a price of $14 per unit which it could produce with the excess capacity. | ||
| Currently, production and sales are anticipated to be 10,000 units without considering the special order. | ||
| Cost of goods sold includes $30,000 of fixed manufacturing cost. | ||
| Below is budget information for the current year sales of 10,000 units follows. | ||
| Sales | $200,000 | |
| Less: cost of goods sold | 150,000 | |
| Gross Margin | $50,000 | |
| Required: | ||
| If the special order is accepted, calculate the specific change in income for only the special order. Make sure you show your work | ||
| Provide a recommendation to management if the company should accept or reject this special order. Explain in detail your recommendation to management. | ||
| Recommendation with calculations and impact to income of special order: | ||
| Variable COGS is 150,000-30,000 fixed cost=120,000 variable cost total divide by 10,000=$12 a unit. | ||
| The company will earn $14-12=$2 a unit for 3,000 units or $6,000 profit. The company should accept the special order, since income will increase by $6,000. | ||
| Decision Making #2-Sell or Process Further Joint Product Decision | ||
| Lido manufactures A and B from a joint process cost = $50,000. Six thousand pounds of A can be sold at split-off for $20 per pound or processed further at an | ||
| additional cost of $10,000 and then sold for $24. Eight thousand pounds of B can be sold at split-off for $14 per pound or processed further at an additional cost of $25,000 and later sold for $17. | ||
| Required: | ||
| Which products should be processed further or not? Why? Give the total dollar impact to income for each product based on your recommendation. | ||
| Recommendation: | ||
| Increase in revenue of $24-20=$4 a unit times 6000=24,000 and cost goes up by $10,000, so process further for profit of $14,000 for product A. Therefore, process further. | ||
| Increase in revenue of $17-14=$3 a unit times 8,000=$24,000 and cost goes up by 25,000, so process further for loss of $1,000 for product B. Therefore, do not process further. | ||
| Decision making #3-Use of Limited Resources-Singe Constraint | ||
| Bush Manufacturing has the following labor hours available for producing M and N: | 26,000 | Total Direct labor hours available |
| Consider the following information: | ||
| M | N | |
| Required Labor per unit in hours | 3 | 2 |
| Maximum demand in units | 8,000 | 7,000 |
| Contribution Margin per unit | 9 | 8 |
| Required: | ||
| What is the optimal product mix(how many M and N should be produced)? Explain your answer and show computations. | ||
| M | N | |
| Contribution Margin per unit | 9 | 8 |
| Required Labor per unit in hours | 3 | 2 |
| Contribution Margin per scarce resource--hours | 3 | 4 |
| Rank order based on highest CM per hour | 2 | 1 |
| Usage of total direct labor hours available based on rank order #1. | 14000 | |
| Remainder of available hours for product ranked #2 | 12,000 | |
| Product Mix: | ||
| Product M units to produce second: | 4,000 | |
| Product N units to produce first: | 7,000 | |
| Explanation: | ||
| Above is the optimal product mix. N will be produced first, since it has the highest contribution margin per direct labor hours which is the scarce resource. The company will make N up to demand and then remainder of direct labor hours will be used to make M. |