finance

Houston Dialysis Center

1. While it might seem unfair that Linda might miss her bonus due to the revised cost allocation strategy, which erodes the division's profits, the total profit of dialysis plus OPD will increase by almost $714,000. So, even though departmental profit will deteriorate, based on these projections & cost allocation strategies, the organizational profit will increase, resulting in higher ROI overall.

2. However, as is seen, such structure results in a loss to to dialysis center. This will create disincentive to the concerned divisional managers as well as negatively affect the financial reports of the entire organization. Since the facilities costs are beyond the DC head's control, including them in the cost structure and result in a loss will be an unfair decision. This argument gets strengthened if we acknowledge that a big part of the facilities costs are sunk costs and should not be considered for incremental decision making purposes - these costs cannot be reversed now, so including them in a full-cost structure will overestimate the cost for DC unit, and underestimate its profits. Therefore, it is not advisable to include these costs into the structure.

3. With no actual facilities costs of $400,000 then there would be a positive full cost profit for the clinic after 20 years. After this many years, the hospital will be glad because the dialysis center will be contributing to profit for the hospital and the revenue from sales will increase.

4. Yes, with the new facility that is more convenient to patients with better features will attract more patients. With an increase in patients, there will be an on increase in expenses and increase in revenue as well. The clinic might even have to buy more equipment and hire more staff, in order to cater the increased demand. This will need to be accounted for in the P&L statement, so they can get an accurate forecast. The Dialysis center will be contributing to the hospital with the increase of revenue.

5. No, I don’t think this seems fair to the dialysis center, the hospital pharmacy is taking all the profit for the drugs that the dialysis center basically created. The dialysis center is creating the revenues because of the number of patients they are treating in the clinic, but they aren’t receiving any profit from that number. I feel that the pharmacy should split some of the revenue with the dialysis center as that would be fair.

6. I think with both clinics being significant to the hospital for revenue but also having large costs associated with them, there needs to be something done about that. If the pharmacy revenue is to split with the dialysis center if they are the one mostly generating revenue this could help them be financially stable. I think the final allocation cost should be based upon the facility cost.