Midterm Sample 1

Midterm Sample 1 - Sauder School of Business Practice...

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Unformatted text preview: Sauder School of Business Practice Midterm Examination Comm 294 Signature: ...................................................... Student number: .................................... .. Time: 120 minutes Total Marks: 106 This examination booklet contains fourteen pages (including this page). Check to ensure this paper is complete. No programmable calculators are permitted Please show all your calculations in an orderly format for part marks. Time management is crucial. Be sure to answer each question. 'No questions will be permitted during this examination. If you need to make an assumption, state it and continue. Read the questions carefully before making any assumptions. TURN YOUR CELL PHONES OFF AND PUT THEM AWAY (IN YOUR BAG OR COAT). CELL PHONES ARE NOT PERMITTED ON THE TABLE. 7 Question 1 (15 marks, suggested time 15 minutes) Cost Behavior Kobe Company's total overhead costs are presented below: Week Assembly Hours Total Overhead Costs First ' 25,000 $87,000 Second 27,500 89,900 Third 20,000 75,100 Fourth 23,500 79,050 Fifth _ 18,000 70,850 Sixth 35,000 110,800 A breakdown of the third week’s overhead cost is as follows: Cost Description Amount Utilities $26,000 Factory Rent ' 14,000 Equipment" Depreciation 6,000 Janitorial Services 29,100 Kobe rents its factories on a monthly basis. The utilities are directly related to assembly time (production). The straight~line method is employed to depreciate the equipment based on the estimated useful life. Janitorial services consist of one person on staff, plus supplies required for cleaning the equipment. Required: a. Estimate the janitorial service cost for week four. (6 marks) b. i) What ianitorial service cost would you expect to be incurred at an operating level of 22,500 assembly hours? (4 marks) ii) What will be the total overhead cost expected at 22,500 assembly hours? (3 marks) 0. in week 7, there could be a strike which would significantly reduce the activity level to 8,000 assembly hours. Can you use all the available information to estimate the total overhead cost in the case that a strike occurred? Explain. (2 marks) ' ' Question #2 (40 marks, suggested time 40 minutes) CVP Farmer Dell (Dell) has a very large pig and poultry farm in Langley and has been in business for many years. The foilowing is a summary of some of the data for an average year of farming: Number of animals sold er ear Averae sales rice per animal Total feed cost er ear Purchase rice er bab animal “De-wormin” shot er animal. er 96" _fl Butcher costs $ 40,000 $13,500 Rental offeedin machines er ear - $ 3,000 $ 2,400 a Dell is presently almost at capacity. There is capacity for 200 more pigs or 1,200 more chickens, A pig uses six times more space than a chicken. - Based on the acreage, Dell has hired three workers who are each paid a salary of $32,000 per year. These workers clean the pig pens and chicken coups and are responsible for operating the feeding machines. 0 The pigs take 24 months to raise from baby animals to when they are ready to be sold. Prior to safe they are sent to the butcher (an independent contractor) who is lecated in the adjacent town. The butcher charges Dell by the animal. The chickens are sent to the butcher after a 12 month stay on the farm! c There is no cost incurred in changing the configuration/volume of pig pens or chicken coups, although they are constrained in aggregate, as per above. a The combined rent on' the buildings and the land is $48,000 per year. _ i 0 Dell can return any feeding machines that he doesn’t need. There is plenty of capacity on each feeding machine, however, the pigs don’t like using the chickens’ machines and the chickens don’t like the pigs’ machines. 0 The income tax rate is 35% 69 _x 01 a CO PART ONE Required: a. Calculate the number of pigs required to be sold each year to break~even if Dell were to only raise pigs (no chickens). (10 marks) ‘ b. Calculate the sales dollars needed per year if Dell wants to farm only chickens and earn an after tax net income of $75,000. (6 marks) 0. Calculate the breakeven point in sales revenue for the year if Dell raises both pigs and chickens. Assume that the sales mix of the past will remain constant. (6 marks) PART TWO An organic chicken feed is available that costs 25% more than the regular feed. Dell would also have to get an organic seller's license that costs $25,000 per year. if Dell uses the organic feed, he will be able to charge more for the "organic chickens”. Dell is _ also hoping that selling “organic chickens" will increase the demand of organic chickens to 24,000 chickens per year. Required: a. If Dell uses the organic feed, how much will the sales price per organic chicken need to be for Dell to make the same contribution margin percent (ratio) per chicken as in PART ONE? (4 marks) b. Calculate the total difference in cost between raising, and selling, 24,000 organic chickens versus 19,200 non-organic (regular) chickens. (6 marks) 0. Identify and discuss two reasons why Dell should sell organic chickens. N0 calculations are required. (4 marks) Reason #1: Reason #2 PART THREE Required: Fully discuss two reasons why a just-in-time inventory system may or may not benefit Dell. 7(4 marks) Reason #1: Reason #2: Question 3 (15 marks, suggested time 15 minutes) Job Order Costing Kenny Lay, the accountant at Aqua Man’s Hot Tubs (AHT), a Canadian customized hot tub building company, had to leave suddenly to look after a sick relative. AHT sells all of its products domestically. You have been called in to clean up the books which have been left in a mess for a month. The company has a December 31 year end. When Kenny left at the end of January, the company had been working on 2 hot tubs. A third hot tub, Job 243, was finished and waiting for pickup by the customer. Kenny’s records at the end of Janua detail the followin: After searching all of the files, you find the additional information: a. An invoice for materials, received in February, totaling $3,185 dated February 3, 2006. A small note on the bottom of the invoice apologizes for the delay. AHT had run out of materials at the end of January and was waiting for this particular shipment to finish working on Jobs 244 and 245. b. Material requisition forms totaling $2,089. Details on the forms indicate that Job 244 received $986 of the material, with the rest going to Job 245. ' c. An invoice to Ted Lee from AHT. The accounts receivable invoice shows that Ted finally picked up his hot tub (Job 243) on February 14, 2006. d. Labour cards were recovered. They show that labourers spent 12 hours finishing ' Job 244. They also worked on Job 245 for 98 hours. ' e. Job 244 was moved to the finished jobs part of the warehouse. REQUIRED: a. What are the ending balances in Raw Materials, Work in Process, and Finished Goods inventory for February? Use the following worksheets to organize your work. (13 marks) ' — — ——— _— _—_ b. Indicate whether Kenny Lay should be concerned over the amount of under'or over-applied overhead at this time, and explain why. NO calculations are required for this question. (2 marks) - 10 Question #4 (36 marks, suggested time 36 minutes) ABC Dr. Knight operates the Midnight Cosmetic Surgery Center (MCSC) in Vancouver. Patients have always been charged the same rate for generai care services each day regardless of the type of cosmetic surgery that they are receiving. The general care services that they incur are room _ services, food (meals) and nursing/postoperative care. MCSC also is required by the Ministry of Health to have continual quality inspections to ensure that the private heaith provider maintains that same impeccable standards as the provincial hospitals. in an effort to streamline the accounting process, Dr. Knight has had an activity analysisperformed (by an analyst) on the services they perform. He discovered that the patients incur these general services regardless of the type of cosmetic surgery that they receive. Estimated Overhead Cost Room services $ 900,000 Post-surgery care 1,200,000 Meals 100,000 Quality care 425,000 Nursing 945,000 Total $ 3,570,000 There are only three cosmetic surgeries that MCSC performs: iiposuction, nose jobs and face- lifts. Obviously, the amount of care and attention will differ based on the particulars of each of these operations. - A review of all the surgeries for the previous year shows that, in total, there were 200 male patients each staying approximately 10 days, and 800 female patients each staying an average of 5 days. The analyst determined that 3,000 patient days were used by liposuction patients; the patient days used by liposuction patients was three times that of nose jobs and 50% more than face- lifts. All patients receive the same meals each day. it was difficult to determine the exact nursing hours used for caring for every surgery, but the ' analysis was able to show that 40,000,18,000 and 5,000 hours were spent on face lifts, liposuction, and nose jobs, respectively. Since each patient has follow-up phone calis and Ministry of Health paper work, MCSC assumes that patients incur nursing services for a full 24 hours regardless of when they are admitted or discharged in a given day. Post-surgery care consists mostly of hygiene care and changing bandages. This is an intense activity carried out by non—nursing staff. Each procedure requires varying amounts of attention. 100,000 yards of bandages were used last year in post-surgery care. Of that amount 50% of the bandages were used on liposuction patients due to the larger areas to cover. Of the remaining bandage usage, face-lifts accounted for 80%. The quality care personnel review the care that the patients are receiving. In order to ensure appropriate service, MCSC is required , on an annual basis, to have an independent quality inspection after every 30 surgeries- i.e., if 9,000 surgeries are performed during a year, 300 inspections will be required. The total surgeries starts at zero at the beginning of each year. During the year there were 250 nose jobs, 400 liposuctions and 350 face lifts. For each type of surgery, assume that the number of malelfemale surgeries was in the same proportion as malelfemale patient days. 11 Required: PART 1 a) Assuming that MCSC uses nursing hours to allocate the overhead, compute the daily overhead rate using this single basis of allocation. (3 marks) ' b) Using activity-based costing, calculate the daily overhead rate for a female ligosuction atient. (16 marks - Room services Fog-surgery care Quality care -I c) Using your application rate calculations above, what would be the total amount of overhead costs _-_ the ear allocated to ma atients forface lifts. 6 marks — Room services Post-surgery care Quality care d) Assume that the center has decided to close for the Easter break. Dr Knight has received a call from a Seattle tour group. In order to take advantage of the cheaper Canadian dollar, they have 45 people who would like to take a bus up to Vancouver and have a nose job performed. They would then return later that same day. They would only require a room for the day of surgery and would not be eating any meals. The tour group witl also bring its own post-surgery care group to provide care after the surgeries-MCSC will provide nursing staff for the day (one nurse will be required for every 5 patients). The have agreed to pay the M080 1.25 times the daily cost of care as well as the direct surgery costs. Dr. Knight _will bring in additional surgeons in order to perform all of the surgeries in one day. Dr. Knight would like you to determine the daily overhead rate - (ignoring direct surgery costs) to charge the tour company. Assume that during the year there will be 250 nose jobs, 400 liposuctions and 350 face lifts performed. (8 marks) 14 e) Wouid Just-In-Time inventory be of benefit to MCSC? Justify your answer with TWO supporting reasons. (3 marks) ' Yes or No? Suggor’cing reason # 1 Sugporting Reason # 2 15 Midterm SOLUTION to Commerce 294 Examination Question 1 (15 marks, suggested time 15 minutes) Cost Behavior and Estimation Required: ' a) Calculate the actual janitorial service cost for Week 4. (6 marks) After an analysis of various cost items which comprise Kobe Company’s overhead costs, we find out that utilities and power are variable costs, rent and depreciation are fixed costs, and janitorial services costs are mixed. ' Using the week 3’s data, we can calculate the unit costs per assembly hour for utilities are $01 .30/hr (=$26,000/20,000 hrs). Cost Cost Behavior Rate Descri tion Utilities ' variable 01_3 Rent fixed Depreciation fixed Janitorial ' mixed Services Therefore, week 4’s janitorial service cost is Total overhead Less Utilities (o1.3*23,500) $ 79,050 (given) 30,550 (calculated) Rent 14,000 (given) Depreciation 6,000 (given) Janitorial Services a 28,500 (total costs net of other costs) b) i) What janitorial service cost would you expect to be incurred at an operating level of 22,500 assembly hours? (4 marks) Either of the following two methods can be used to solve this question. First, using high-low method to determine the variable and fixed components ofjanitorial service cost. High activity level: 35,000 hrs, and the janitorial cost: $45,300 (=$110,800-1.3*35,000- 14,000-6,000). Low activity level: 18,000 hrs, and thejanitorial cost: $27,450 (=$70,850-1.3*18,000- 14,000-6,000). Variable component per assembly hour = (45,300-27,450)/(35,000-18,000)=$1.05lhr 16 Fixed component = $45,300 — 35,000 hrs*$1.05/hr = $ 8,550 Or Fixed component = $27,450 — 18,000 hrs*$1.05/hr = $ 8,550 Therefore, the cost formula for the janitorial service cost is $8,550+1.05*X. _ii)What will be the total overhead cost? (3 marks) The cost formula for total overhead cost wilt be $1 .3‘_’(X)+20,0_00+8,550+1.05*(X)=2.35*(X)+28,550. Total OH cost at 22,500 assembly hours will be 2.35*22,500+28,550=$81,425. The janitorial service cost at 22,500 assembly hours will be 1 .05*22,500+8,550=$32,175. Using high-low method to determine the variable and fixed components of total overhead costs. High activity level: 35,000 hrs, and the total overhead cost: $110,800. Low activity level: 18,000 hrs, and the total overhead cost: $70,850. Variable component per assembly hour = (110,800-70,850)/(35,000-18,000)=$2.35/hr Fixed component = $110,800 — 35,000 hrs*$2.35lhr = $ 28,550 Or Fixed component = $70,850 —~ 18,000 hrs*$2.35/hr = $ 28,550 Therefore, the cost formula for the total overhead cost is $28,550+2.35*X. And the cost formula for janitorial service cost will be 2.35*X+28,550-($1.3*X+20,000) = 1.05*X+8,550. Thus, total OH cost at 22,500 assembly hours will be 2.35*22,500+28,550=$81,425. The janitorial service cost at 22,500 assembly hours will be 1 .05*22,500+8,550=$32,175. c) In week 7, there will be a potential strike which could significantly reduce the activity level to 8,000 assembly hours. Can you use all the available information to estimate thetotal overhead cost under the strike? Why or why not? (2 marks) 8,000 assembly hours under the strike is outside of the relevant range of activities for Kobe Company. Therefore, the cost formula developed previously will be inappropriate for estimating the cost levels during the strike. 17 Question #2 (40 marks, suggested time 40 minutes) Cost-Volume-Profit AnalySis PART ONE Required: 7 a. Calculate the number of pigs required to be sold each year to break-even if Dell were to only raise pigs (no chickens). (10 marks) Revenue § 150.00 Variable costs Feed cost ($50,000/2000 pigs x 2 50.00 years) Purchase price of babies 12.00 De-worming (8.00 x 2 years) 16.00 Butcher ($40,00072000 pigs) 20.00 Variable costs 98.00 65.33% Contribution margin per pig $ 52.00 34.67% Fixed costs Feeding machines $3,000 Hired help 96,000 $3 x 32,000 Rent 48,000 $147,000 Break-even number of pigs = 147,000/5200 = $2,827 pigs Since Dell "...has been in business for many years”, after their second year in business, they will have “fully grown" pigs for sale every year— i.e., the pigs raised when they started (Year 0) would be ready for sale at the end of Year 2 and the pigs raised at the end of Year 1 would be ready for safe at the end of Year 3, etc. b. Calculate the sales dollars needed per year if Dell wants to farm only chickens and earn an after tax net income of $75,000. (6 marks) Revenue 8 8.00 Variable costs Feed cost ($19,800/18,000) 1.10 Purchase price of babies .50 De-worming 0 Butcher (13500718000) fl _ Variable costs 7 2.3 ' 29.375% Contribution margin per chicken $ 5.65 70.625% Fixed costs Feeding machines $2,400 Hired help 96,000 $3 x 32,000 Rent 48,000 $146,400 # of sales dollars to ea'rn'after tax of $75,000 = (146,400 + lT5,000/(1-.35))) 70.625% = 370,668 18 0. Calculate the breakeven point in sales revenue for the year if Deli raises both pigs and chickens. Assume that the sales mix of the past will remain constant. (6 marks) The demand for chickens is 9 x higher than the demand for pigs (18,000 vs 2,000), therefore the ratio is 9:1. Contribution margin per pig from above = $52.00 Contribution margin per chicken from above = 50.85 (5.65 x 9) Total package contribution margin 102.85 Total fixed costs (2,400 + 3,000 + 96,000 + 48,000) = $149,400 Break-even packages = 149,400/102.85 = 1,452.60 Breakeven sales revenue = 1453 pigs x $150.00 = $ 217,950 1453 x 9 x 8.00 = 104,616 $ 322,566 PART TWO Required: a. if Dell uses the organic feed, how much wiil the sales price per organic chicken need to be for Deli to make the same contribution margin percent (ratio) per chicken as in PART ONE? (4 marks) Variable costs Feed cost ($19,800/18,000) * 1.25 1.375 Purchase price of babies .50 De—worming 0 Butcher (13500118000) fl Variable costs . 2.625 / 29.375% = $8.936 b. Calculate the total difference in cost between raising, and selling, 24,000 organic . chickens versus 19,200 non-organic (regular) chickens. (6 marks) - Organic variable costs (2.625 x 24,000) $ 63,000 Less non-organic variable (2.35 x 19,200) (45,120) Additional fixed costs- license 25,000 Opportunity cost (800 x $52)* 41,600 ' § 84,480 CAPACITY = 2,000 Pigs & 19,200 Chickens % 2,200 Pigs & 18,000 Chickens *Number of pigs lost in sales Available capacity = Additional chickens required Amount over capacity 0 (none with 19,200 chickens) 4,800 chickens (24,000 — 19,200) 4,800 chickens The excess capacity ratio indicates 200 pigs or 1200 chickens. Thus, pigs use 6 times the capacity. Thus, if Farmer Dell has 4,800 more chickens, will need more space. Since “a pig uses six times more space than a chicken", the 4,800 extra chickens will take up the space for 4800/6 = 800 pigs. Thus, Farmer Deli will have to "give up" the CM on 800 pigs to accommodate the 4,800 extra chickens. Thus, if go with 24,000 chickens, can only raise 1,200 pigs (2,000 — 800). Amount of pigs lost sales = 4,800 chickensl6 = 800 pigs x $52.00 margin = $41,600 19 c. Fully discuss two reasons why Dell should sell organic chickens. No calculations. (4 marks) it looks like the demand for organic chickens is a lot higher than that of ordinary chickens. Therefore Dell stands a good chance of using up more of the available capacity and making more money. The only problem with this is that Dell may need to get rid of the pigs. Organic chickens may be better for the environment and health of people in the long run. There is a trend toward organic and thus there may be higher margin available in this new market and the old market may have decreasing margins as consumers are not wiling to pay as much. PART- THREE Required: Fully discuss two reasons why a just—in-time system may or may not benefit Deli. (4 marks) It would be very difficult to implement a just—in-time system for Dell's farm with regards to the suppliers unless the suppliers have some control over the "hatching dates" of the chicks and the birthing times of the pigs. Dell may have to buy the pigs and chicks only when they are available. The just-in-time system would work better for supplying to the purchasers, in that he can offer fresh animals whenever they want because he could kill the animals “on demand”. However, this does not help Dell with inventory control, since any animals that are not purchased will still have to be fed. Dell may be able to usejust-in-time for training the personnel to be able to perform all manners of tasks, such as feeding, cleaning, fixing pens, etc., However, this will do nothing to increase the flow of inventory through the farm. 20 Question 3 ——-—_......_...... a. (13 marks Raw Materials — —_ — ——— End. Enventow — _ $ 1.243 — IE_ 1.103 2 DL12hrsx$11.50 DL98 x$11.50 1.127 0H12hrx$51hr## m- OH 98 WSW —__ * 244 completed —_ 1243+986+138+60 (244 ($2,427 End. Invento — $3,203 ## POH Rate: ' DLH = $5751$11.SO per hour = 50 and Applied MOH ($250) I DLH (50) = POH ($5/DLH) OR DLH = $299 / $11.50 per hour = 23 and Applied MOH ($130) / DLH (23) = POH ($5/DLH) OR DLH = $138 I $11.50 per hour = 12 and Applied MOH ($60) / DLH (12) = POH ($5/DLH) Finished Goods — $ 1.751 b. -(2marks) Kenny should NOT be concerned about any over or under application at this time. The company has a December 31, year end therefore any over or under application (a debit or credit on the manufacturing overhead account) will be carried forward for the remainder of the year. Any over or under application will be eliminated at year end. 21 Question #4 (36 marks, suggested time 36 minutes) ABC PART 1 e) Assuming that MCSC uses nursing hours to allocate the overhead. Compute the daily rate using this single basis of allocation. ( 3 marks) $3,570,000 40,000 + 18,000 + 5,000 = 56.67 per nursing hour Daily based on 24hours = 56.67 x 24 3 $1,360.08 per day t) Using activity based costing, calculate the daily rate to be charged to a female Liposuction patient. ( 16 marks) Room services ' $300,000 $400,000 Post-surgery care Meals $100,000 . (200 men x 10days ) + ( 800 women x Sdays ) = $16.67 per patient day $33,340 _ Cost/day x # of lipos x proportion female days =$16.67x 3000 lipos x (5days x 800 female/ 6000) I Quality care $1 14,623 __m990... (200 men x 10days ) +( 800 women x Sdays ) = $150 per patient day Cost/day x # of lipos x proportion female days =$150x 3000 lies )4 (Sda s x 800 female/ 6000) $1 200 000 100,000 yds. = $12/yard $fyd x amt used in Lipo x proportion of women patients days. $12 x ( 100,000 x 50%) x (Sdays x 800 female/ 6000) Total procedures I 30 procedures {inspection = # of inspections (250 +400 + 350 )/30 = 33.33 inspections or 33 (since one after every 30) Cost per inspection = overhead cost I # of inspections $425,000 / 33 inspections 2 $12,879 per inspection Female Lipo surgeries = (400 x 400/600) = 267 Inspections = 267/30 = 8.9 inspections Cost of female Lipo inspections = $12,879 x 8.9 22 Nursing $945,000 63,000 nursing hours 15 per nursing hour 180 000 iii/hour x nursing hours for lipo x prop of women $15 x 18,000 x 4000/6000 ' — Total allocation $1,027,963 Lipo female patient days 2,000 (5x800) x 300/6000 g) Using your application rate calculations above, what would be the total amount of overhead during the year charged to male patients seeking a face lifts. (6 marks) Room services/meals = $150 per patient day Cost/day x face lift days it proportion of male $100,000 =$150 x 2000 face lift x (10days x 200 male! 6000) $1,200,000 . $160,000 100,000 yds. $11,113 Post-surgery care = $ 12/yard $/yd x X used in F L’s x proportion of men patients. $12 x( 100,000 x [(100%— 50%) x 80%]:t (10days x 200 male! 6000) 12 x (100,000 x 40%) x 2000/6000 = $16.67 per patient day Cost/day x face lift days x proportion of male =$16.67 x 2000 face lift x (10da s x 200 male/ 6000) $425,000 / 33 inspections = $12,879 per inspection Male FL surgeries = 350 x 200/600 = 117 Male FL inspections = 117/30 = 3.9 Male FL inspections $12,879 x 3.9 23 Nursing $15 per nursing hour $/hour x nursing hours for FL x prop of men days 200,000 $15 x 40,000 x (2000/6000) - Total allocation $521,341 d) Dr. Knight would like you to determine the daily overhead rate (ignoring direct surgery costs) to charge the tour company. (8 marks) Recalculate the room $900,000 . only daily rate (200 men x 10days ) + ( 800 women x Sdays ) = $150 per patient day 45 patients x 150 "—= Post-surgery care There will be no post operative care needed No Meals are needed Quality care ' Currently 1,000/30 = 33.33 inspections Thus, 33. Now 1,045/30 = 34.83 inspections. Thus, 34. Thus, one additional inspection will be required under the ministry requirements. 1 x 12,879 Nursing _ $15 per nursing hour 3,240 _ $15 x 9 nurses (45 patients/5) x 24 hours _ Total allocation 22,869 — Holida mark 11 h) Would Just in time inventory be of benefit to MCSC? Justify your answer with TWO supporting reasons. (3 marks) JIT would most likely NOT be of benefit to MCSC: 0 J IT works well in situations of constant production. It is unclear whether the activity at MCSC has a constant level of activity 0 Suppliers could not meet MSCS’s demands on 24 hour a day basis .0 The volume of activity is way too low 0 Postoperative care would require the available supplies to be on the premises for whatever is needed. This goes against the idea of J IT. The suppliers could not react to the needs unless they were in the immediate area. 0 Meals may be supplied on a J IT basis — ordered and delivered each day 0 JIT is NOT appropriate for nursing care (or any labour activity) 24 ...
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Midterm Sample 1 - Sauder School of Business Practice...

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