. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for Linda to possibly lose her bonus, just because the Outpatient Clinic needs additional space?
2. In the past, the medical center has aggregated all facilities costs, and then allocated the total amount on the basis of square footage. The proposed allocation for the Dialysis Center, on the other hand, requires it to bear the true facilities costs of its new space. What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme?
3. If the new allocation method for facilities costs is implemented, what should be the facilities allocation to the Dialysis Center in 20 years, when the loan, and hence total cost of the move, has been paid off and there are no longer any actual facilities costs?
4. Do you think the new Dialysis Center will be able to attract more patients? What impact would additional volume have on the facilities allocation decision?
5. Although not shown on Table 1, the Center uses (sells) $800,000 of drugs annually in its dialysis treatments, which cost the hospital (pharmacy) $400,000. The $400,000 profit on these drugs accrues to the pharmacy, which records $800,000 of revenues and $400,000 of costs on its P&L statement. Does this seem fair? If not, what could be done to remedy the situation?
6. When all issues related to the decision are considered, what is your recommendation regarding the handling of the pharmacy revenues and the final allocation amounts?
It is not fair for the Dialysis to suffer profitability and Linda to lose her bonus because of the expansion of outpatient clinic needs. Even though, the Dialysis is a nonprofit acute facility that needs to get such profits to provide good services. Linda is also entitled to a bonus for the services she renders, and it is not fair for her to lose the bonus as this will impact on her life and even on the delivery of services due to de-motivation.
The new methodology that requires the hospital to bear the costs of the new space has advantages as well as disadvantages. The advantage of this methodology is that the facility will be in a position to increase the number of patients. The disadvantage is that the facility will have to incur huge costs in terms of interest that will be remitted. It will also take a very long period for the facility to begin accruing profits. Even though it is costly, I support the new methodology for its long-term benefits.
After the 20-year loan has been paid and the total cost of the move has been settled, the facilities allocation to the dialysis center should be as follows: £2,700,000 revenue, £2,100,000 total expenses, £570,000 total overhead costs, and £30,000 net profit. This is because the facility will be serving the same number of patients. Therefore, in twenty years, the net profit will be £600,000.
The new Dialysis center is likely to attract more patients because it has enough space for parking. Because of the likely increase in the number of patients, the hospital will have to adjust its allocations to cater for the increased number. For instance, it will be required to increase the staff and equipment, which will require more investments.
The profit generated is higher and yet the facility does not disclose it in the final reports. This is not fair for the patients and other stakeholders, as they will have to spend more money in buying the drugs. The pharmacy should consider adjusting the prices of the drugs to a level that eliminates exploitation.
Pharmacy revenues are not handled well in accordance with the principles of accounting. The information is required to be disclosed as part of the revenue. Therefore, the facility must provide this information in its subsequent financial reporting. The final allocation amount for the new facility is justified and is going to benefit the patient and enhance delivery of service. Therefore, it is a good decision for the facility.