Hopkins Community Hospital operates an outpatient clinic in a town several miles from the main hospital. For
Question:
Hopkins Community Hospital operates an outpatient clinic in a town several miles from the main hospital. For several years the clinic has struggled just to break even. The clinic’s financial budget for 20X7 is shown below:
On the average, billings for each patient-visit are expected to be $180. Costs in 20X7 are expected to average $183 per patient-visit, as follows:
Physician time …………… $ 60
Nurse and technician time … 45
Supplies ……………………. 15
Overhead ………………….. 63
Total ……………………. $183
The clinic is generally staffed by one physician who must be present whether or not there is a patient to see. Currently, about 10% of the physician’s time is idle. The clinic employs nurses and technicians to meet the actual workload necessitated by patient appointments. Their cost averages $30 per hour, and usage varies proportionately with the number of patient-visits. Supplies cost is also variable with respect to patient-visits. Fixed overhead in 20X7 was expected to be $180,000; the remaining $72,000 of overhead varies with respect to patient visits. Included in the fixed overhead was $30,000 of hospital-wide administrative costs that the hospital allocates to the clinic and $37,500 of depreciation on the clinic’s property and equipment.
Cindy Ryden, controller of Hopkins Community Hospital, reported the actual loss of $20,200 in 20X7 shown next. This represented the fifth straight year of losses. She does not feel it is right for patients in the main hospital to subsidize those using the clinic. Therefore, she suggested that unless the situation could be changed, the clinic should be closed. Brett Johnson, administrative vice president of the hospital, charged with oversight of the clinic, disagreed: “We provide a valuable service to the community with the clinic. Even if we are losing money, it is worthwhile to keep it open.”
At the end of 20X7, the clinic’s actual results for the year were as follows:
1. Would Hopkins Community Hospital have saved money in 20X7 if the outpatient clinic was closed? Explain.
Step by Step Answer:
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta