Case study is from Buchbinder, S. B., Shanks, N. H., & Kite, B. J. (2021). Introduction to Health Care Management (4th ed.). Burlington, MA: Jones & Bartlett Learning

50,000 sq ft are dedicated to outpatient care and orthopedics. Outpatient portion of the hospital currently uses about 75% of the space for routine medical care and the other 25% used for orthopedic care.

I learned during a directors meeting with the CEO and CFO of the hospital I work at, that due to an increase in demand for routine care services, the orthopedics department I work in needs an additional 25% of space, that is 50,000 square feet x 25% or an additional 12,500 square feet. This additional space need would bring the total routine care space needs to 50,000 square feet, the entire current space allotted.

I determined:

Total Indirect Expenses Without Allocation-

• Routine Care - $307,500
• Orthopedics Care- $195,150

Total Indirect Expenses After Allocation- Revenue Method Allocation 1

Routine: $450,000

Ortho: $263,000

Total Indirect Expenses After Allocation - Square Foot Method Allocation 2

Routine: $476,000

Ortho: $238,000

Net Income For Each Department - Before Allocation

Routine Care- $86,500

Orthopedics - $1,850

Net Income For Each Department - After Allocation

Revenue Method Allocation

Routine Care - $129,500

Orthopaedics- $2,300

Square Foot Method Allocation

Routine Care- $104,000

Orthopaedics- $23,200

Do you think the cost allocation method of using revenue as a cost driver is a fair allocation method? Why or why not?