Assignment 2 Soln

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Assignment 2 Soln Powered By Docstoc
					 Account #          Account Name             Cost              Driver         Type of Activity
    101        Nursing Services         $    2,973,154   Nursing hours                   PD
    102        Nursing Admin.           $    1,269,762   Nursing hours                   PD
    103        Pharmacy                 $      496,629   # Patient days                  PD
    104        Laboratory               $      312,347   # tests                         PD
    105        Medical Supplies         $      482,165   # Patient days                  PD
    106        Linen & Laundry          $      358,736   Pounds of laundry               PD
    107        Dietary                  $      813,148   # Meals                         PD
    108        Emplyee Cafeteria        $      167,239   # Nurse days                    PD
    109        Housekeeping             $      706,308   Square feet                     F
    110        Med Records & Lib        $      250,345   # patients                      P
    111        Social Services          $      199,026   # patients                      P
    112        Patient Sch. & Admn.     $       60,238   # patients                      P
    113        Billing & Collection     $      112,280   # patients                      P
    114        Plant Operations         $      301,238   Square feet                     F
    115        Plant Maintenance        $      386,622   Square feet                     F
    116        Med Equip. Oper.         $      496,275   # Procedures                    PD
    117        Insurance on property    $       38,350   Value of property               F
    118        Hosp. Depreciation       $      960,573   Value of property               F
                                        $   10,384,435

 Account #           Account Name               Cost             Driver       Type of Activity
                          Patient Day Related Activities (Unit-Based)
     101        Nursing Services           $    2,973,154 Nursing hours                  PD
     102        Nursing Admin.             $    1,269,762 Nursing hours                  PD
     103        Pharmacy                   $      496,629 # Patient days                 PD
     104        Laboratory                 $      312,347 # tests                        PD
     105        Medical Supplies           $      482,165 # Patient days                 PD
     106        Linen & Laundry            $      358,736 Pounds of laundry              PD
     107        Dietary                    $      813,148 # Meals                        PD
     108        Emplyee Cafeteria          $      167,239 # Nurse days                   PD
     116        Med Equip. Oper.           $      496,275 # Procedures                   PD
    Total Patient Day Related Activities $      7,369,455
                Number of Patient Days              45,606
                    Cost per Patient Day $         161.59
                           Patient Related Activities (Batch-Based)
     110        Med Records & Lib          $      250,345 # patients                     P
     111        Social Services            $      199,026 # patients                     P
     112        Patient Sch. & Admn.       $       60,238 # patients                     P
     113        Billing & Collection       $      112,280 # patients                     P
        Total Patient Related Activities $        621,889
                      Number of Patients             8,367
                         Cost per Patient $         74.33
                                   Facility Sustaining Activities
     109        Housekeeping               $      706,308 Square feet                    F
     114        Plant Operations           $      301,238 Square feet                    F
     115        Plant Maintenance          $      386,622 Square feet                    F
     117        Insurance on property      $       38,350 Value of property              F
     118        Hosp. Depreciation         $      960,573 Value of property              F
        Total Facility Related Activities $     2,393,091
                 Number of Square Feet
                    Cost per Square Feet
Total Operating Costs                       $ 10,384,435
Minumum Reimbursement for 14-Day Stay
Patient-Day Related Costs               14 $   161.59   $ 2,262.25
Patient Related costs                    1 $    74.33   $    74.33
     Total                                              $ 2,336.58

c.
                                                Deluxe       Regular

Estimated Manufacturing Support Costs                                      $   1,000,000
Estimated production (units)                       5,000          40,000
DL Hours                                               2               1             50,000
Selling Price     Per Unit                           140              80
DM Cost           Per Unit                            45              30
DL Cost           Per Unit                            20              10

    ABC Data         Cost                          Cost Driver Units Demanded
     Activity       Driver           Cost       Deluxe     Regular       Total
Purchase Orders # Orders         $ 180,000           200         400            600
Quality Control  # Inspections   $ 250,000         1,000       1,000           2000
Setups           # Setups        $ 220,000           100         100            200
Mach. MaintenanceM. Hours        $ 350,000        20,000     15,000          35000
                                 $ 1,000,000

a.
Manufacturing Support cost Drive Rate          $   20.00 Per DL Hour

b.
Cost to Manufacture                             Deluxe       Regular
                DM                             $     45     $     30
                DL                             $     20     $     10
                MS                             $     40     $     20
                Unit Manuf. Cost               $   105      $     60

c.                                             Cost Driver Rate
Activity
Purchase Orders                                $     300    Per   Order
Quality Control                                $     125    Per   Inspection
Setups                                         $   1,100    Per   Setup
Mach. Maintenance                              $      10    Per   Maintenance Hour

ABC Support Cost Assignment                     Deluxe       Regular
Activity           Rate
Purchase Orders     $     300                  $ 60,000     $ 120,000
Quality Control     $     125                  $ 125,000    $ 125,000
Setups              $   1,100                  $ 110,000    $ 110,000
Mach. Maintenance $        10                  $ 200,000    $ 150,000
Total Support Cost                             $ 495,000    $ 505,000
Number of Units                                     5,000       40,000
Unit M. Support Costs                          $ 99.0000    $ 12.6250

Cost to Manufacture                             Deluxe       Regular
                DM                             $     45     $     30
                DL                             $     20     $     10
                MS                             $     99     $ 12.63
                 Unit Manuf. Cost              $164.00      $ 52.63
d.                                                                       Ratio of Del: Reg
Activity                                        Deluxe      Regular
Purchase Orders                                   0.0400      0.0100                    4
Quality Control                                   0.2000      0.0250                    8
Setups                                            0.0200      0.0025                    8
Mach. Maintenance                                 4.0000      0.3750                10.67

                        Conventional                       ABC
e.                 Deluxe         Regular        Deluxe        Regular
Selling Price    $ 140.00 $            80.00 $ 140.00 $ 80.00
Unit Mfc Cost    $ 105.00 $            60.00 $ 164.00 $ 52.63
Unit Gross Margin $ 35.00       $     20.00     $ (24.00) $ 27.38
No! The Deluxe model is not only less profitable, it is losing money!

f.
             Item                                 Overhaul
                                       Old          of Old   New Machine
                                     Machine       Machine
Acquisition Cost (Or Overhaul)   $      50,000   $    25,000 $    70,000
Accumulated Depreciation         $      40,000
Annual Operating Cost            $      18,000   $    14,000    $       13,000
Current Salvage Value            $       4,000
Salvage Value, End 5th Yr        $         -     $          -   $          -

a&b
             Item                                 Overhaul
                                       Old           Old    New Machine
                                     Machine       Machine
Acquisition Cost (Or Overhaul)   $      50,000   $   25,000 $    70,000
Accumulated Depreciation         $      40,000
Annual Operating Cost            $      18,000   $    14,000    $       13,000
Current Salvage Value            $       4,000
Salvage Value, End 5th Yr        $         -     $          -   $          -

                                 Sunk Cost
                                 Relevant
                                 Not Sunk but Irrelevant!

c.                                                Overhaul               New Machine
                                                    Old     New Machine Difference
                                                  Machine
Acquisition Cost (Or Overhaul)                   $ (25,000) $   (70,000)
Current Salvage Value                                        $    4,000 $ (41,000) Once
Annual Operating Cost                            $ (14,000) $   (13,000) $    1,000 Per Year

If interest rate is zero:                                                        $   (36,000)
Conclusion: Based on quantitative factors only, overhaul old machine!
                                             Old             New         Production
         Item                              Machine          Machine       Quantity
Acquisition Cost                       $     300,000    $     360,000
Remaining Life (Years)                        4                4
Salvage Value Now                      $     100,000    $          -
Salvage Value, End of 4 Yrs            $        4,000   $        6,000
Annual Operating Cost                  $     140,000    $      80,000
Defect Rate                                        5%            2.50%
Rework Cost Per Unit                   $            1   $            1
Units                                                                          100,000


a                                            Old             New         New Machine
         Item                              Machine          Machine       Difference
Acquisition Cost                                      $      (360,000)
Salvage Value Now                                     $       100,000    $    (260,000)   t=0
Salvage Value, End of 4 Yrs            $       4,000 $          6,000    $       2,000    t=End of 4
Annual Operating Cost                  $    (140,000) $       (80,000)   $      60,000    t=1 to 4
Cost of Defects                        $      (5,000) $        (2,500)   $       2,500    t=1 to 4
Assuming interest rate of zero %
     Cash Flows            Time                                              Amount
                                   0                                     $    (260,000)
                                   1                                     $      62,500
                                   2                                     $      62,500
                                   3                                     $      62,500
                                   4                                     $      64,500
                                                                         $      (8,000)

b                      Acquisition cost of old machine is a sunk cost


c. Other Considerations
Possible increase in sales due to lower defects with new machine
Cost of money (cost of capital) to discount future cash flows, though in this case it will
  be more negative
         Cost Category             Amount
Product Recalls                $       325,000   E
Downtime (due to defects)      $       600,000   I
Warranty Claims                $       420,000   E
Inspection / Testing           $       300,000   A
Product Liability Lawsuits     $       500,000   E
Process Quality Audits         $       350,000   A
Rework Costs                   $     2,000,000   I
Quality Training               $       150,000   P
Process Control Monitoring     $       350,000   A
Repair Costs in Field          $       375,000   E
Statistical Process Control    $       300,000   P
Waste                          $       900,000   I
Net Cost of Scrap              $     1,500,000   I
Supplier Certification         $       350,000   P
Quality Engineering            $       200,000   P
CM on Returned Products        $       380,000   E
Total Sales                    $    75,000,000
a.
         Cost Category             Amount            % of Sales
           Prevention
Quality Training               $      150,000    P
Supplier Certification         $      350,000    P
Quality Engineering            $      200,000    P
Statistical Process Control    $      300,000    P
Total Prevention Costs         $   1,000,000          1.33%

          Appraisal
Inspection / Testing           $      300,000 A
Process Quality Audits         $      350,000 A
Process Control Monitoring     $      350,000 A
Total Appriasal Costs          $   1,000,000          1.33%

       Internal Failure
Downtime (due to defects)      $      600,000    I
Rework Costs                   $    2,000,000    I
Waste                          $      900,000    I
Net Cost of Scrap              $    1,500,000    I
Total Internal Failure Costs   $   5,000,000          6.67%

       External Failure
Product Recalls                $      325,000    E
Warranty Claims                $      420,000    E
Product Liability Lawsuits     $      500,000    E
Repair Costs in Field          $      375,000    E
CM on Returned Products        $      380,000    E
Total External Failure Costs   $   2,000,000          2.67%

Total Quality Costs            $  9,000,000           12.00%
Total Sales                    $ 75,000,000

				
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