Problem 13.45

Cost Reduction

Mercy Hospital is a private hospital that serves an aging population. The hospital administrator, Donna Morgan, believes that insurance companies and Medicare will move to fixed payments for specific procedures, which will put increasing pressure on hospitals to control costs. A common procedure performed at Mercy Hospital is hip-replacement surgery. Morgan has asked the hospital’s CFO to prepare information on the current costs of hip replacements at Mercy so that they can explore the financial viability of this (and other) procedures. Consider the following information gathered by the CFO:

Expected charger reimbursement (sales price) $25,000

Required return on charges (return on sales) 30%

Current average cost per hip replacement $22,000

To cover profit goals and other support service costs

Required

a. Are hip replacement surgeries financially viable?

b. A cross functional team of administrators, surgeons, nurses, and support personnel analyzed the hospital’s hip replacement procedure and estimated that, through better scheduling and postoperative care, Mercy could reduce hospital stays from an average of nine days to five days with no loss of quality of care. In fact, because elderly patients would be hospitalized for shorter periods, they would be less likely to contract respiratory infections. Improvements on the procedure can result in a reduction of the average cost of a hip replacement by $8,000. If this were accomplished, what is the expected return on charges for a hip replacement?

c. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to solve requirements (a) and (b)

Problem 13.47

Add/Drop Business Unit

Chapman & Tracy is a regional firm that offers audit, tax, and consulting services. The partners are concerned about the profitability of their audit business, and a closure decision might be forthcoming. If the firm drops the audit activities, it might do more tax work. Only 30 percent of the facility costs associated with auditing disappears by dropping the auditing function. More tax work can increase tax revenues by 40 percent, but tax service level costs also increase by 40 percent. Total facility cost is unchanged whether or not tax work is increased. Segmented income statements for these three product lines follow

Auditing Tax Consulting

Sales $300,000 $500,000 $600,000

Service level cost 250,000 300,000 350,000

Shared facility cost 50,000 60,000 80,000

Operating income (loss) $0 $140,000 $170,000

Required

a. Determine which alternative Chapman & Tracy should choose: (1) drop the auditing line without increasing tax work or (2) drop auditing and increase tax work

b. What other considerations are important to the decision to drop auditing?

c. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to solve requirement (a)

Problem 14.63

Use Forecasts in Net Present Value Analysis

Furlong Manufacturing is considering investing in a robotics manufacturing process. Purchase and installation of the process will cost an estimated $2,900,000. This amount must be paid immediately. The company expects to dismantle this production process at the end of its seven year life and salvage the equipment for $100,000. Furlong will depreciate the process equipment at $400,000 per year. Stating in year 4, the company expects significant quality improvements valued at $2.1 million until the end of the process in year 7. Because this investment is risky, the company believes it should use an 18 percent discount rate. The company’s effective tax rate is 35 percent

Required

a. Compute the net present value of this investment

b. Is this a routine or strategic investment? Explain

c. What is your evaluation of the way this company models risk?

d. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to solve requirement (a)

Exercise 16.28

Straightforward Computation of Variances

Kalamazoo Container Company manufactures recyclable soft drinks cans. A unit production is a case of 12 dozen cans

Actual material purchases amounted to 239,000 kilograms at $.81 per kilogram. Actual costs incurred in the production of 50,000 units follow:

Direct labor $213,200 for 13,000 hours

Direct material $170,100 for 210,000 kilograms

The following standards have been set by the production engineering staff and the controller

Direct material quantity, 4 kilograms price, $.79 per kilogram

Direct labor quantity, 25 hour rate, $16 per hour

Required

Use the variance formulas to compute the direct material price and quantity variances and the direct labor rate and efficiency variances. Indicate whether each variance is favorable or unfavorable

Exercise 16.36

Direct Material Mix and Yield Variances

Bay State Technology has set the following direct material standards for its product, the photon gismo

Standards costs for one unit of output:

Material I, 10 units of input at $100 per unit

Material II, 20 units of input as $150 per unit

During August, the company had the following results:

Universal gismos produced 2,000 units

Materials purchased and used:

Material I 22,000 units at $94

Material II 38,000 units at $152

Required

a. Compute the direct material price and quantity variances

b. Compute the direct material mix and yield variances

c. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to complete requirements (a) and (b)

Exercise 17.42

Sales Variances

Bay State Beach Wear, Inc., manufactures and sells beach T-shirts on Cape Cod. The business is very competitive. The budget for last year called for sales of 200,000 units at $9 each. However, as the summer season approached, management realized that the company could not sell 200,000 units at the $9 price but would have to offer price concessions. Budgeted variable cost is $3.65 per unit. Actual results showed sales of 190,000 units at an average of $8.75 each. The actual variance cost was $3.65 per unit

Required

a. Compute the following variances for Bay State Beach Wear: revenue budget variance, sales price variance, and revenue sales volume variance

b. BUILD YOUR OWN SPREADSHEET. Build an Excel spreadsheet to complete requirement (a)

### Recently Asked Questions

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- Please refer to the attachment to answer this question. This question was created from Chapter 6 COS. Additional comments: "Debt Service Fund Information The

- Please refer to the attachment to answer this question. This question was created from Chapter 6 COS.