western - A problem recently arose when Western Hospital...

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Unformatted text preview: A problem recently arose when Western Hospital demanded a price reduction for the laboratory work associated with an amniocentesis. This procedure is performed at Western on a regular basis, but after the merger, the laboratory work for it has been performed at Academic. However, Western had recently found that an independent laboratory would do the work for $375, as compared with the $400 Academic was charging. Although the total dollars involved were not substantial (Western only had about 300 amniocenteses per year), all agreed that an important policy issue was involved and that resolution should be sought. A joint oversight committee of the two hospitals found that the direct incremental costs of performing the amniocenteses were $300 in labor and supplies. In addition, Academic was charging $90 for overhead that would be incurred whether or not the amniocentesis laboratory tests were done at Academic, and $60 for profit. It was also found that Western was currently making a $105 profit on the entire procedure but could raise that profit by $75 if it could get the laboratory work done for $75 less. How much would the transfer price be under • full charges, • variable costs, • market price, and • negotiated price? How much profit does each hospital make under each alternative? How much would the transfer price be under How much do the combined hospitals make under each of the above alternatives? What would happen if a) full charges; Western purchased from an outside laboratory for $375 Labour & Supplies­­­­­­­­­­­­­­­­­­­­ 300 Overhaeds­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­90 Profit­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­60 Transfer price­­­­­­­­­­­­­­­­­­­­­­­­450 b)variable costs; Labour & Supplies­­­­­­­­­­­­­­­­­­­­­ 300 Profit (60/390*300)­­­­­­­­­­­­­­­­­­­­­ 45 Transfer price­­­­­­­­­­­­­­­­­­­­­­­­­­345 c)market price; Independent lab charges­­­­­­­­­­­­­ 375 Transfer price­­­­­­­­­­­­­­­­­­­­­­­­­­­375 d) negotiated price? Academic charges­­­­­­­­­­­­­­­­­­­­­400 Transfer price­­­­­­­­­­­­­­­­­­­­­­­­­­­400 How much profit does each hospital make under each alternative? How much do the combined hospitals make under each alternative? a) full charges; Particular­­­­­­­­­­­­­­­­­­­Academic­­­­­­­­­­­­­­­­­­Western Sale/Transfer­­­­­­­­­­­­­­­450­­­­­­­­­­­­­­­­­­­­­­­­­­­505 Cost­­­­­­­­­­­­­­­­­­­­­­­­­­390­­­­­­­­­­­­­­­­­­­­­­­­­­­450 Profit­­­­­­­­­­­­­­­­­­­­­­­­­­­60­­­­­­­­­­­­­­­­­­­­­­­­­­­­­55 Combined profit­­­­­­(60+55)= 115 b) variable charges; Particular­­­­­­­­­­­­­­­­­­­Academic­­­­­­­­­­­­­­­­­­Western Sale/Transfer­­­­­­­­­­­­­­­345­­­­­­­­­­­­­­­­­­­­­­­­­­­505 Cost­­­­­­­­­­­­­­­­­­­­­­­­­­390­­­­­­­­­­­­­­­­­­­­­­­­­­­345 Profit­­­­­­­­­­­­­­­­­­­­­­­­­(45)­­­­­­­­­­­­­­­­­­­­­­­­­­160 Combined profit­­­­­­((45)+160)= 115 c) Market price; Particular­­­­­­­­­­­­­­­­­­­Academic­­­­­­­­­­­­­­­­­­Western Sale/Transfer­­­­­­­­­­­­­­­375­­­­­­­­­­­­­­­­­­­­­­­­­­­505 Cost­­­­­­­­­­­­­­­­­­­­­­­­­390­­­­­­­­­­­­­­­­­­­­­­­­­­­375 Profit­­­­­­­­­­­­­­­­­­­­­­­­­(15)­­­­­­­­­­­­­­­­­­­­­­­­­­­130 Combined profit­­­­­­((15)+130)= 115 d) Negotiated price; Particular­­­­­­­­­­­­­­­­­­­Academic­­­­­­­­­­­­­­­­­­Western Sale/Transfer­­­­­­­­­­­­­­­400­­­­­­­­­­­­­­­­­­­­­­­­­­­505 Cost­­­­­­­­­­­­­­­­­­­­­­­­­­390­­­­­­­­­­­­­­­­­­­­­­­­­­­400 Profit­­­­­­­­­­­­­­­­­­­­­­­­­­­10­­­­­­­­­­­­­­­­­­­­­­­­­­­105 Combined profit­­­­­­(10+105)= 115 What happens if Western purchases from an outside lab for $375? Particular­­­­­­­­­­­­­­­­­­­Academic­­­­­­­­­­­­­­­­­­Western Sale/Transfer­­­­­­­­­­­­­­­­000­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­505 Cost(Fixed overhead)­­­­­90­­­­­(independent lab)­­­­­­375 Profit­­­­­­­­­­­­­­­­­­­­­­­­­(90)­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­130 Combined profit­­­­­­((90)+130)= 40 ...
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