Case 3 Report

1. Background Rio Grande Medical Center is a full service not-for-profit acute care hospital with 325 beds. Most of the hospital’s facilities are devoted to inpatient care and emergency services, but a 100,000-square-foot section of the hospital is devoted to outpatient (OP) services. Of the 100,000-square-foot OP section, the OP Clinic uses 80%/80,000-square-feet, and the remaining 20%/20,000-square-feet are used by the Dialysis Center. Increased patient volume at the OP Clinic has created a need for 25% more space than it is currently assigned. Due to its large size and patients’ need to access other departments the decision has been made to move the Dialysis Center to another location, and allow the OP Clinic to …show more content…
Lastly, their general overhead costs are also set at 10% of their total revenues.
b. The P&L Statement with the CFO’s new indirect cost allocation scheme (after expansion)
(1) The Dialysis Center
Under the CFO’s new indirect cost allocation scheme (Exhibit 2) the Dialysis Center’s revenues and direct costs remain unchanged. However, under indirect costs their facilities cost has increased to $400,000. This cost is based upon the new facility’s total cost of $4,000,000, which will be financed by a 7.75%, 20-year mortgage loan. This increases their total overhead to $670,000, which reduces their net profit to ($70,000) and their percent of revenues to (2.6%). If annual bonuses are based off total costs instead of only direct costs, the Dialysis Center’s Director will not earn an annual bonus; in fact, he may actually owe the Medical Center money. The facilities cost per square foot has changed as well, with the price increasing to $20 per square foot. This has increased because of the CFO’s desire to allocate facility overhead on a true cost basis. Historically, facility overhead was allocated on an aggregate basis, which meant everyone paid the same price per square foot regardless of the facility’s age or value. Lastly, their general overhead cost remains set at 10% of their total revenues.
(2) The OP Clinic Under the CFO’s new indirect cost allocation scheme (Exhibit 2) the OP