MBA 6100 CAse study problems

MBA 6100

Fall 2014, Block 1

Case Study #1

Students are to submit one Excel file for this case with each problem on a unique worksheet. All calculations must be clearly indicated/articulated in your case preparation. You also must utilize formula functions where appropriate.

Problem #1 – DPN Health Systems – CVP Analysis

DPN Health Systems operates a general hospital in southern Delaware. The medical center also rents space and beds to separately owned entities rendering specialized services, such as Stroke Rehabilitation and Psychiatric Care. DPN charges each separate entity for common services, such as patients’ meals and laundry, and for administrative services such as billings and collections. Space and bed rental are fixed charges each year, based on bed capacity rented to each entity. DPN Health Systems charged the following costs to Stroke Rehabilitation for the year ended December 31, 2013:

			Patient days		Bed Capacity
			(Variable)		(Fixed)
Dietary	$	700,000
Janitorial		-	$	80,000
Laundry		340,000		-
Laboratory		560,000		-
Pharmacy		400,000		-
Repairs and maintenance		-		35,000
General and administrative		-		1,420,000
Rent		-		1,750,000
Billings and collections		300,000		-
Total	$	2,300,000	$	3,285,000

During the year ended December 31, 2013, Stroke Rehab charged each patient an average of $375 per day, had a capacity of 60 beds, and had revenue of $7.0 million for 365 days. In addition, Stroke Rehab directly employed personnel with the following annual salary costs per employee: supervising nurses, $32,000; nurses, $23,500; and aides, $12,000.

DPN has the following minimum departmental personnel requirements based on total annual budgeted patient days:

	Supervising
Annual Patient-days	Nurses	Nurses	Aides
Up to 22,000	4	10	20
22,001 to 26,000	5	14	25
26,001 to 29,000	5	16	31

Stroke Rehab always employes only the minimum number of required personnel. Salaries of supervising nurses, nurses, and aides are therefore fixed within ranges of annual patient-days.

Stroke Rehab operated at 100% capacity on 90 days during the year ended December 31, 2013. Administrators estimate that on these 90 days, Stroke Rehab could have filled another 20 beds above capacity. DPN has an additional 20 beds available for rent for the year ending December 31, 2014. Such

additional rental would increase Stroke Rehab’s fixed charges based on bed capacity. (In the following requirements, ignore income taxes).

Required:

1. Calculate the minimum number of patient-days required for Stroke Rehab to break even for the year ending December 31, 2014, if the additional 20 beds are not rented. Patient demand is unknown, but assume that revenue per patient-day, cost per patient-day, cost per bed, and salary rates will remain the same as for the year ended December 31, 2013.

1. Assume that patient demand, revenue per patient-day, cost per patient-day, cost per bed, and salary rates for the year ending December 31, 2014, remain the same as for the year ended December 31, 2013. Prepare a schedule of Stroke Rehab’s increase in revenue and increase in costs for the year ending December 31, 2014. Determine the net increase or decrease in Stroke

Rehab’s earnings from the additional 20 beds if Stroke Rehab rents this extra capacity from DPN Health Systems.

1. Should Stroke Rehab rent the extra capacity?

Problem #2 – Willer Company – Product Costing

Willer Company is a small computer component manufacturer. Several years ago, the company decided to concentrate on only three models, which were sold under many brand names to electronics retailers and mass-market discount stores. For internal purposes, the company uses the product names Sonic, Rapid, and Lightning to refer to the three components.

The President of the company has issued the following memo:

I don’t understand this. In 2012, we decided to drop our highest-end Sonic model and only produce the Rapid and Lightning models, because our cost system indicated we were losing money on Sonic. Now, looking at preliminary numbers, our profit is actually lower than last year and it looks like Rapid has become a money loser, even though our prices, volumes, and direct costs are the same. Can someone please explain this to me and maybe help me decide what to do next year?

Data on the three models and selected costs follow:

For the year ended December 31, 2012:
		Sonic		Rapid	Lightning	Total
Units produced and sold		6,000		11,000		19,000	36,000
Sales price per unit	$	140.00	$	115.00	$	65.00
Direct materials cost per unit	$	75.00	$	60.00	$	25.00
Direct labor-hours per unit		2.5		1.5		1.0
Wage rate per hour	$	21.00	$	21.00	$	21.00
Total manufacturing overhead						$	700,000

For 2013, the company only produced the Rapid and Lightning models. Total overhead was $625,000. All other volume, unit prices, costs, and direct labor usage were the same as in 2012. The product cost system at Willer Products allocates manufacturing overhead based on direct labor hours.

Required:

1. Compute the product cost and gross margins (revenue less cost of goods sold) for the three products and total gross profit for 2012. (Round your numbers to 2 decimal places)

1. Compute the product cost and gross margins (revenue less cost of goods sold) for the two products and total gross profit for 2013. (Round your numbers to 2 decimal places)

3. Should Willer drop Rapid for year 3? Explain (your explanation must include a numerical analysis to support your position).

Hint: Total manufacturing overhead above includes both fixed and variable costs. Use the high-low method to separate the Total Manufacturing Overhead into variable and fixed costs and then analyze the Rapid model using contribution margin analysis. I will give 2 points extra credit to anyone who can explain how we know the manufacturing overhead includes both fixed and variable costs.