Assignment ACC

SUGGESTED SOLUTIONS TO CASE QUESTIONS

students should:

1. Identify the various elements needed to conduct CVP analyses, 2. Describe the cost structure of a service company, 3. Apply CVP analysis in a multiproduct situation and for a special-order decision, 4. Analyze decisions based on the outcome of CVP analyses, and 5. Integrate nonpecuniary into business decision making. 1. Identify and compute the various types of cost for the company according to cost behavior. You are required to determine the monthly fixed and variable costs for scan and lab services that the company incurs. From the case, GEO Medical Laboratory incurs both fixed and variable costs. The fixed costs include the depreciation of the laboratory and scan equipment and furniture. Because of the agreement between GEO Medical laboratory and the healthcare facility, rent will not be included as part of the fixed costs of the company. In addition, the salaries of the employees, with the exception of the ultrasonographers, can be considered fixed costs. This is because the salaries are paid regardless of whether there are clients. The variable costs of the company are the costs of consumables and the compensation for ultrasonographers. Because GEO Medical laboratory has an agreement with the health facility, the cost of utilities is not included in the variable costs. The calculations of the monthly fixed and variable costs are provided in Tables TN-1a and TN-1b.

2. Assume that GEO Medical Laboratory only provides scan services, and determine the breakeven in terms of units and sales. If the only services that GEO Medical Laboratory offers are lab services, determine the number of patients that the company would need to help in order to break even, as well as the break-even amount. Assume that the salary of the administrative assistant is evenly distributed between the two services and the usage of furniture and fittings, computer, and printer are equally shared. What does your answer imply?

3. Determine the cost structure of GEO Medical Laboratory. Is the company highly or lowly leveraged?

4. Assuming a multiproduct situation, how many patients and how much total revenue does GEO Medical Laboratory need to break even in a month? 5. How many patients must GEO Medical Laboratory attend to in a month if it wants to make a profit of US$3,000? How many of these patients should be scheduled for lab services and how many for scan services? 6. Determine the amount of revenue that GEO Medical has to generate in a month to earn an operating profit of US$3000. How much of this revenue will be generated from lab and scan services, respectively? 7. Based on quantitative calculations should Wallas accept the school’s offer? Why or why not?

Please answer very carefully the above, and you should :

1. Write a one-page management summary of your recommendations to improve the profitability of GEO Medical Laboratories. 2. Include a copy of your calculations for the first seven questions. 3. Write a separate page of explanations where you clarify your calculations

The following is an example of prior student work, have a look but don’t copy and base the answer, as this is suppose to help you to have just an idea how you should do

Case Study: Realizing the Dream: Decision Making in Action

Done By: XXXXXXXX

XXXXXXXX

Question 1:

§ Identify and compute the various types of cost for the company according to cost behavior.

Answer:

According to the cost behavior, there are two types of costs:

1. Variable costs.

2. Fixed costs.

Variable costs:

Variable costs in total vary directly and proportionally with changes in volume

Laboratory Costs per patient $6.69

Fixed costs:

Fixed cost in total does not change with a change in volume (Remain constant)

Computer and Printer - Depreciation 540 × 0.33 $179.98 Furniture and Fittings - Depreciation 1,260 × 0.2 252 Laboratory Equipment - Depreciation 14,200 × 0.2 2.840 Scan Equipment - Depreciation 9,000 × 0.2 1.800 Laboratory Costs per month 75.17 Administrative assistant - Salary 125.00 Lab technicians - Salary 200 × 2 Employee 400.00 Ultrasonographers - Commission 97.20 Rent 125 Utilities 100 Janitorial Services 15 Total fixed costs $6,009.35

§ Determine the monthly fixed and variable costs for scan and lab services that the company incurs.

Answer:

Scan services:

Cost per Month Fixed cost Variable cost

Depreciation $150.00

(9.000 × 0.2) ÷ 12

Consumables : A4 paper 5.00 per month Envelopes 6.00 per month Gloves 30.00 per month Tissues 5.00 per month

Toners 16.66

50.00 per quarter ÷ 3

Gel $1.25 per patient Thermal print paper 2.50 per patient Salary 62.5 per month Commission 97.20 per month Total $372.36 $3.75

Lab services:

Cost per Month Fixed cost Variable cost

Depreciation $236.67

(14.200 × 0.2) ÷ 12

Consumables : A4 paper 5.00 per month Alcohol 2.50 per month Bandages 7.50 per month Cotton 2.50 per month Envelopes 6.00 per month Gloves 30.00 per month

Toners 16.66

50.00 per quarter ÷ 3

Reagents $1.25 per patient Syringes 0.125 per patient Test kits 1.25 per patient Test tubes 0.31 per patient Salary 62.5 per month Commission 400.00 per month Total $769.33 $2.93

Question 2:

§ Assume that GEO Medical Laboratory only provides scan services, and determine the breakeven in terms of units and sales

Answer: Before calculating the break-even point to scan services, it must first be determined

1. Selling price. 2. Total fixed costs. 3. Variable costs per unit.

Then, the application is in the equation of the break-even point

• Break even quantity (Patients) = Fixed costs ÷ (Price of product - Variable costs) Or Fixed costs ÷ Contribution margin

• Break even (Revenue) = Selling Price per Unit × Breakeven Volume

The data submitted in the problem about scan services are:

Price : 9 × 180 $1.620 Variable costs : Gel 1.25 per patient 1.25 × 180 = $225 Thermal print paper 2.50 per patient 2.50 × 180 = 450 Total variable costs $675 Contribution margin $945 Contribution margin per scan (9 - 3.75) $5.25

Fixed costs :

Depreciation $150.00

(9.000 × 0.2) ÷ 12

A4 paper 5.00 per month Envelopes 6.00 per month Gloves 30.00 per month Tissues 5.00 per month

Toners 16.66

50.00 per quarter ÷ 3

Commission 97.20 per month Salary 62.5 per month Total fixed costs $372.36

Thus, Break even quantity (Patients) =

Fixed costs ÷ (Price of services - Variable costs)

Or Fixed costs ÷ Contribution margin per scan

$372.36 ÷ (9 - 3.75) = 70.92 Patients per month.

Once the breakeven volume has been calculated, the breakeven volume can also be used to find the breakeven revenue, because total revenue is equal to the total number of units sold multiplied by the selling price per unit

Break even (Revenue) =

Selling Price per Unit × Breakeven Volume

$9 × 70.92 = $638.28 Per month.

§ If the only services that GEO Medical Laboratory offers are lab services, determine the number of patients that the company would need to help in order to break even, as well as the break- even amount

Answer:

The data submitted in the problem about lab services are:

Price : 11.25 × 120 $1.350 Variable costs : Reagents $1.25 × 120 $150 Syringes 0.125 × 120 15 Test kits 1.25 × 120 150 Test tubes 0.31 × 120 37.2 Total variable costs $352 Contribution margin $998 Contribution margin per lab (11.25 - 2.93) $8.32

Fixed costs :

Depreciation $236.67

(14.200 × 0.2) ÷ 12

A4 paper 5.00 per month

Alcohol 2.50 per month Bandages 7.50 per month Cotton 2.50 per month Envelopes 6.00 per month Gloves 30.00 per month

Toners 16.66

50.00 per quarter ÷ 3

Commission $400.00 Salary 62 Total fixed costs $768.83

Thus, Break even quantity (Patients) =

Fixed costs ÷ (Price of product - Variable costs)

Or Fixed costs ÷ Contribution margin

768.83 ÷ ($11.25 - 2.93) = 92.40 Patients per month.

Once the breakeven volume has been calculated, the breakeven volume can also be used to find the breakeven revenue, because total revenue is equal to the total number of units sold multiplied by the selling price per unit

Break even (Revenue) =

Selling Price per Unit × Breakeven Volume

11.25 × 92.40 = $1,039 per month.

Question 3:

Determine the cost structure of GEO Medical Laboratory. Is the company highly or lowly leveraged?

Answer:

Lab services Scan services Total Sales 1.350 1.620 $2.970 Variable Costs 352 675 1.027 Contribution margin 998 945 1,943 Fixed costs 768.83 372.36 1,141 Operating income 229.17 572.64 $802

Then, calculate the Degree of operating leverage

Degree of operating leverage = Contribution margin ÷ Operating income

= 1,943 ÷ 802 = 2.42

The company's cost structure shows that it is a low leverage

Question 4:

Assuming a multiproduct situation, how many patients and how much total revenue does GEO Medical Laboratory need to break even in a month?

Answer:

First, we need to calculate Total Revenues to break even

weighted Average Contribution margin Ratio 1,943 ÷ 2.970 = 0.65 Total Fixed Cost $1,141 Total Revenues to break even $1.755

Second, calculate Break-even point in dollar to scan & lab:

Break-even point in dollar to scan 1.350 ÷ (2.970 × 1.755) $2.590 Break-even point in dollar to lab 1.620 ÷ (2.970 × 1.755) 3.108 Total dollars to Break-even point $5.698

Third, calculate Break-even point in patients to scan & lab:

Break-even point in patients to scan 2.590 ÷ 9 287.77 Break-even point in patients to lab 3.108 ÷ 11.25 276.26 Total Patients to Break-even point 564.03

Question 5:

§ How many patients must GEO Medical Laboratory attend to in a month if it wants to make a profit of US $3,000?

Answer:

weighted Average Contribution margin Ratio 1,943 ÷ 2.970 = 0.65 Total Fixed Cost $1,141 + Target profit 3.000 4,141 Total Revenue (for $3.000 Target profit) 4,141 ÷ 0.65 $6,370

§ How many of these patients should be scheduled for lab services and how many for scan services?

Answer:

Note: First, calculate the dollars amount (Q6) and then calculate the quantity of patients.

sales for scan (patients) 1.816 ÷ 9 201 sales for lab (patients) 7.135 ÷ 11.25 634 Total Patients 835

Question 6:

Determine the amount of revenue that the company needs to generate in a month to earn an operating profit of US$3,000. How much of this revenue will be generated from lab and scan services, respectively?

Answer:

sales for scan (dollar) 1.620 ÷ (2.970 × 6,370) $1.816 sales for lab (dollar) 1.350 ÷ (2.970 × 6,370) 7.135 Total dollars $8.951

Question 7:

Based on quantitative calculations, should Wallas accept the school’s offer? Why or why not?

Answer:

The order testing for

1. 122 Male & 2. 150 Female

And the price is $3 per student

item Cost for Male Cost for Female Total cost Blood grouping reagents and sickle cell

$152.50 $187.50 $340.00

Gloves 12.20 15.00 27.20 Optician 56.07 68.94 125.00 Other consumables 65.88 81.00 146.88 Pregnancy test kits -- 187.50 187.50 Transportation and logistics

44.85 55.15 100.00

Total costs $331.50 $595.08 $926.58

Then, we must calculate the net revenue (loss) to determine if Wallas should accept the offer or not.

Sales / Revenue $3 × 272 $816 Costs: Total offer costs 926.58 Eye Specialist Cost 125 Net Loss ($235.58)

This indicates that the offer should not be accepted, because the income obtained is not sufficient to cover the variable costs!

Question 8:

Besides profitability, what other motives might influence Wallas’ decision about the offer from the local school? Discuss how such offers might benefit (or harm) GEO Medical Laboratory. Answer:

Since the current service fee is higher than the offer of the school, approval of this offer may affect both the short and the long term. Short-term impact: If this offer is approved, many passive institutions will ask for Wallas' services, which could expose Wallas' to a bad reputation in the event that the contract is not approved. Long-term impact: Other patients will also likely demand a price reduction and thus the overall profit will be affected.

Question 9:

Give Wallas at least three specific recommendations to increase revenue or to reduce the costs for his company. Which of these three recommendations do you think is the best for Wallas right now and why? Be clear about why this recommendation is preferred.

Answer:

1. He has to renegotiate with Manna Healthcare regarding the fees charged. As it is better for him and in the current situation (and unlike in the past) to set a fixed amount to be paid periodically. 2. Clarify and commit Manna Healthcare to the agreement previously entered into. So that patients are referred to the laboratory automatically. If Manna Healthcare does not respond and abides by the agreement, he must immediately transfer his work to another location. 3. Also, it is possible to conduct marketing campaigns and provide packages of medical testing, which will enable it to increase profits