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Houston Dialysis Center

Essay by   •  February 15, 2018  •  Case Study  •  680 Words (3 Pages)  •  5,146 Views

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  1. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for Linda to possibly lose her bonus, just because the Outpatient Clinic needs additional space?

No, there should be some sort of adjustment to distribute allocation to both clinics, so they can see a profit because of the additional space. The Dialysis Center was the one that had to move, so they shouldn’t be the ones to suffer in profit.

  1. In the past, the medical center has aggregated all facilities costs, and then allocated the total amount on the basis of square footage. The proposed allocation for the Dialysis Center, on the other hand, requires it to bear the true facilities costs of its new space. What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme?

Advantages would be that they are using the same equipment and staff, so they would get a break there on money. Also, this method would be fairer toward cost allocation rather than everything being divided amongst two clinics. The disadvantages would be that the Dialysis Center must bear the true facilities cost of its new space. The outpatient service getting more patients due to a larger facility, the focus would be on that clinic. I support the new allocation scheme because it does show the true cost of each individual clinic.

  1. If the new allocation method for facilities costs is implemented, what should be the facilities allocation to the Dialysis Center in 20 years, when the loan, and hence total cost of the move, has been paid off and there are no longer any actual facilities costs?

With no actual facilities costs of $400,000 then there would be a positive full cost profit for the clinic after 20 years. After this many years, the hospital will be glad because the Dialysis Center Clinic will be contributing to profit for the hospital and the revenue from sales will increase.

  1. Do you think the new Dialysis Center will be able to attract more patients? What impact would additional volume have on the facilities allocation decision?

Yes, with a new facility that is more convenient to patients with better parking the Dialysis Center will attract more patients. With an increase in patients, there will be an increase in expenses and an increase in revenue as well. The clinic might even have to buy more equipment and hire more staff, to be able to take in the increased patient count. This will need to be accounted for in the P&L Statement, so they can get a corrected forecast. The Dialysis Center will be contributing to the hospital with the increase of revenue.

  1. Although not shown on Table 1, the Center uses (sells) $800,000 of drugs annually in its dialysis treatments, which cost the hospital (pharmacy) $400,000. The $400,000 profit on these drugs accrues to the pharmacy, which records $800,000 of revenues and $400,000 of costs on its P&L statement. Does this seem fair? If not, what could be done to remedy the situation?

No, I don’t think this seems fair to the Dialysis Center. The hospital pharmacy is taking all the profit of the drugs that the Dialysis Center basically created. The Dialysis Center is creating the revenue because of the number of patients they are serving in their clinic. But they aren’t receiving any profit from that number. I feel that the pharmacy should have to split some of the revenue with the Dialysis Center for it to be fair.

  1. When all issues related to the decision are considered, what is your recommendation regarding the handling of the pharmacy revenues and the final allocation amounts?

I think with both clinics being significant to the hospital for revenue but also having large costs to them, there needs to be something done to help that. If the pharmacy revenue was split with the Dialysis Center if they are the one mostly creating the revenue this could help them be financially stable. I think the final allocation cost should be based upon the facility cost.

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