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HSA 525 WEEK 4 Chapter 8 365 Required Compute the contribution margin for Greenside Clinic. "*Assignment Exercise 7-2: Calculating the Contribution Margin The Mental Health program for the Community Center has just completed its fiscal year end. The program director determines that his program has revenue for the year of $1,210,000. He believes his variable expense amounts to $205,000 and he knows his fixed expense amounts to $1,100,000. Required 1. Compute the contribution margin for the Community Center Mental Health Program. 2. What does the result tell you about the program? Example 7C: Cost-Volume-Profit (CVP) Ratio and Profit-Volume (PV) Ratio Closelyreview the examples of ratio calculations in the chapter text. Also note that examples are presented in visualsas well as text. Practice Exercise 7-111:Calculating the PV Ratio The profit-volume (PV) ratio is also known as the contribution margin (CM) ratio. Use the same assumptions for the Community Center Mental Health Program. In addition to the contribution margin figures already computed, now compute the PVratio (also known as the CMratio) . Assignment Exercise 7-3: Calculating the PV Ratio and the CVP Ratio Use the same assumptions for the Greenside Clinic. One more assumption willbe added: the clinic had 35,000visits. Required 1. In addition to the contribution margin figures already computed, now compute the PVratio (also known as the CMratio) . 2. Add another column to your worksheet and compute the clinic's per-visit revenue and costs. 3. Create a Cost-Volume-Profitchart. Refer to the chapter text along with Figure 7-6. CHAPTER 8 ~signment Exercise 8-1: FIFO and UFO Inventory Study the FIFO and LIFO explanations in the chapter. 366 EXI\.i'vIPLESAi~DEXERCISES, SUPPLEMEl'.'TAL l'vlATERIALS, AND SOLUTIONS Required / a.l. Use the format in Exhibit 8-1"FIFOInventory Effect"to compute the ending FIFOinventory and the cost of goods sold, assuming $90,000in sales;beginning inventory500 units @ $50;purchases of 400 units @ $50; 100units @ $65;400 units @ $80. " a.2. Also compute the cost of goods sold percentage of sales. " b.1. Use the format in Exhibit 8-2 "LIFO Inventory Effect" to compute the ending LIFO inventory and the cost of goods sold, using same assumptions. " b.2. Also compute the cost of goods sold percentage of sales. " c. Comment on the difference in outcomes. *Assignment Exercise 8-2: Inventory Turnover Study the "Calculating Inventory Turnover" portion of the chapter closely,whereby the cost of goods sold divided by the average inventory equals the inventory turnover. Required Compute two inventory turnover calculations as follows: "..1. Use the LIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover. ,- 2. Use the FIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover. Example SA:Depreciation Concept Assume that MHS purchased equipment for $200,000 cash on April 1st (the first day of its fiscal year). This equipment has an expected life o£1Oyears. The salvage value is 10 percent of cost. No equipment was traded in on this purchase. Straight-line depreciation is a method that charges an equal amount of depreciation for each year the asset is in service. In the case of this purchase, straight-line depreciation would amount to $18,000 per year for 10 years. This amount is computed as follows: Step 1. Compute the cost net of salvage or trade-in value: 200,000 less 10 percent salvage value or 20,000 equals 180,000. Step 2. Divide the resulting figure by the expected life (also known as estimated useful life): 180,000 divided by 10 equals 18,000 depreciation per year for 10 years. Accelerated depreciation represents methods that are speeded up, or accelerated. In other words a greater amount of depreciation is taken earlier in the lifeof the asset.One example of accelerated depreciation is the double declining balance method. Unlike straight-line depreciation, trade-in or salvage value is not taken into account until the end of the depreciation schedule. This method uses book value, which is the net amount remaining when cumulative previousdepreciation is deducted from the asset's cost.The computation isas follows: Step 1. Compute the straight-line rate: 1 divided by 10 equals 10 percent. Step 2. Now double the rate (as in double declining methods: 10 percent times 2 equals 20 percent. Chapter 8 367 Step 3. Compute the first year's depreciation expense: 200,000 times 20 percent equals 40,000. Step 4. Compute the carry-forward book value at the beginning of the second year: 200,000 book value beginning Year 1 less Year 1 depreciation of 40,000 equals book value at the beginning of the second year of 160,000. Step 5. Compute the second year's depreciation expense: 160,000 times 20 percent equals 32,000. Step 6. Compute the carry-forward book value at the beginning of the third year: 160,000 book value beginning Year 2 less Year 2 depreciation of 32,000 equals book value at the beginning ofthe third year ofl28,000. -Continue until the asset's salvage or trade-in value has been reached. -Do not depreciate beyond the salvage or trade-in value. Practice Exercise 8-1: Depreciation Concept Assume that MHS purchased equipment for $600,000 cash on April 1st (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10 percent of cost. No equipment was traded in on this purchase. Required 1. Compute the straight-line depreciation for this purchase. 2. Compute the double declining balance depreciation for this purchase. ~signment Exercise 8-3: Depreciation Concept Assume that MHS purchased two additional pieces of equipment on April 1st (the first day of its fiscal year), as follows: (1) The laboratory equipment cost $300,000 and has an expected life of 5 years. The salvage value is 5 percent of cost. No equipment was traded in on this purchase. (2) The radiology equipment cost $800,000 and has an expected life of 7 years. The salvage value is 10 percent of cost. No equipment was traded in on this purchase. Required For both pieces of equipment: 1. Compute the straight-line depreciation. 2. Compute the double declining balance depreciation. Example 8B: Depreciation This example shows straight-line depreciation computed at a five-year useful life with no salvage value. Straight-line depreciation is the method commonly used for financing projections and funding proposals. Depreciation Expense Computation: Straight Line 5-year useful life; no salvage value Chapter 8 369 Year # Annual Depreciation Remaining Balance Beginning Balance = 1 24,000* 2 14,400* 3 8,640* 4 6,480** 5 6,480** * = double declining balance depreciation ** = straight-line depreciation for remaining two years (12,960 divided by 2 = 6,480/yr) 60,000 36,000 21,600 12,960 6,480 6,480 Practice Exercise 8-11: Depreciation Compute the straight-line depreciation for each year for equipment with a cost of $50,000, a 5-year useful life, and a $5,000 salvage value. ~signment Exercise 8-4: Depreciation Set up a purchase scenario of your own and compute the depreciation with and without salvage value. -*Assignment Exercise 8-5: Depreciation Computation: Units-of-Service Study the "Units-of-Service" portion of the chapter closely. Required 1. Using the format in Table 8-A-5,compute units-of-service depreciation using the following assumptions: Cost to be depreciated = $50,000 Salvage value = zero Total units of service = 10,000 Units of service per year: Year 1 = 2,200;Year 2 = 2,l00; Year 3 = 2,300; Year 4 = 2,200;Year 5 = 200 2. Using the same format, compute units-of-service depreciation using adjusted assumptions as follows: Cost to be depreciated = $50,000 Salvage value = $5,000 Total units of service = 10,000 Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200;Year 5 = 200 Table 8-A-5 Units-at-Service (Units-at-Production) Depreciation: 5-Years at Service with No Salvage Value Cost (to Be Depreciated) Depreciation Computation Units of Service per Year x Depreciation per Unit Accumulated Net Remaining Annual Depreciation Undepreciated Depreciation (Reserve for Cost Expense Depreciation) (Net Book Value) $2,000 $2,000 $8,000 1,800 3,800 6,200 1,600 5,400 4,600 2,200 7,600 2,400 2,400 10,000 -0- Year 1 Year 2 Year 3 Year 4 Year 5 $10,000 Total Units $1,000 900 800 1,100 1,200 5,000 $2.00' 2.00 2.00 2.00 2.00 *($10,000) divided by total units (5,000) equals depreciation per unit of ($2.00). .:,.:.t,. '"'"~~ [ b::l g ~: :::: ~;,...;, i"2".. "". <::>~~~~< ::>~ <.D ce 370 EXAlVlPLES Al'\J"D EXERCISES, SUPPLEMENTAL MATERV\LS, Al'\J"D SOLUTIONS CHAPTER 9 Example9A Reviewthe chapter text about annualizing positions. In particular reviewExhibit 9-2,which contains the annualizing calculations. Practice Exercise 9-1: F'I'Es to Annualize Staffing The office manager for a physicians' group affiliated with Metropolis Health System is working on her budget for next year. She wants to annualize her staffing plan. To do so she needs to convert her staff's net paid daysworked to a factor. Their office is open and staffed seven days a week, per their agreement with two managed care plans. The office manager has the MHS worksheet, which shows 9 holidays, 7 sick days, 15 vacation days, and 3 education days, equaling 34 paid days per year not worked. The physicians' group allows8 holidays, 5 sick days,and 1 education day.An employee must work one full year to earn 5 vacation days. An employee must have worked full time for three full years before earning 10 annual vacation days. Because the turnover is so high, nobody on staffhas earned more than 5 vacation days. Required 1. Compute net paid daysworked for a full-time employee in the physicians' group. 2. Convert net paid days worked to a factor so the office manager can annualize her staffing plan. *Assignment Exercise 9-1: Ff'Es to Annualize Staffing The Metropolis Health System managers are also working on their budgets for next year. Each manager must annualize his or her staffing plan, and thus must convert staff net paid days worked to a factor. Each manager has the MHS worksheet, which shows 9 holidays, 7 sick days, 15vacation days,and 3 education days, equaling 34 paid days per year not worked. The Laboratory is fully staffed seven days per week and the 34 paid days per year not worked is applicable for the lab. The Medical Records department is also fully staffed seven days per week. However, Medical Records is an outsourced department so the employee benefits are somewhat different. The Medical Records employees receive 9 holidays plus 21 personal leave days which can be used for any purpose. Required 1. Compute net paid days worked for a full-time employee in the Laboratory and in Medical Records. 2. Convert net paid daysworked to a factor for the Laboratory and for Medical Records so these MHS managers can annualize their staffing plans. Chapter 9 371 Example 9B Reviewthe chapter text about staffing requirements to fill a position. In particular review Exhibit 9-4, which contains (at the bottom of the exhibit) the staffing calculations. Remember this method uses a basic work week as the standard. Practice Exercise 9-11: FTEs to Fill a Position Metropolis Health System (MHS) uses a basic work week of 40 hours throughout the system. Thus, one full-time employee works 40 hours per week. MHS also uses a standard 24- hour scheduling system of three 8-hour shifts. The Admissions manager needs to compute the staffing requirements to fill his departmental positions. He has more than one Admissions office staffed within the system. The WestAdmissions office typically has twoAdmissions officers on duty during the day shift, one Admissions officer on duty during the evening shift, and one Admissions officer on duty during the night shift. The day shift also has one clerical person on duty. Staffing is identical for all seven days of the week. Required 1. Set up a staffing requirements worksheet, using the format in Exhibit 9-4. 2. Compute the number ofFTEs required to fill the Admissions officer position and the clerical position at the WestAdmissions office. --t:Assignment Exercise 9-2: FTEs to Fill a Position Metropolis Health System (MHS) uses a basic work week of 40 hours throughout the system. Thus, one full-time employee works 40 hours per week. MHS also uses a standard 24- hour scheduling system of three 8-hour shifts. The Director of Nursing needs to compute the staffing requirements to fill the Operating Room positions. Since MHSis a trauma center the OR is staffed 24 hours a day, 7 days a week. At present, staffing is identical for all seven days of the week, although the Director of Nursing is questioning the efficiency of this method. The Operating Room department is staffed with two nursing supervisors on the day shift and one nursing supervisor apiece on the evening and night shifts. There are two technicians on the day shift, two technicians on the evening shift, and one technician on the night shift. There are three RNs on the day shift, two RNs on the evening shift, and one RN plus one LPN on the night shift. In addition, there is one aide plus one clerical worker on the day shift only. Required 1. Set up a staffing requirements worksheet, using the format in Exhibit 9-4. 2. Compute the number ofFfEs required to fill the Operating Room staffing positions. 78 CHAPTER8 Understanding Inventory and Depreciation Concepts Exhibit 8-1 FIFO Inventory Effect Assumptions FIFO Inventory Effect Sales (Revenue) 20 units @$25 = $500 Cost of Sales: Beginning inventory Plus: Purchases 10 units @$5 = 10 units @$10 = $100 & 10 units @$15 = $150 $50 250 $300 (150) Subtotal Less: Ending inventory Cost of Sales 10 units @$15 = 150 Gross Profit $350 Operating Expenses (50) Earnings before Tax $300 Income Tax (90) Earnings after Tax $210 [Note: ending inventory computed as number of units in the beginning inventory plus number of units purchased less number of units sold-count oldest units sold first.] No Method: Inventory Never Recognized This inventory costing method is no method at all. That is, inventory is never recognized. For example, a physician's office may expense all drug purchases as supplies at the time of purchase and never count such drugs as inventory. This treatment might be justified when such supplies were only a small part of the practice expenses. However, if the physician is purchasing very expensive drugs and administering them in the office (infusing expensive drugs is a good example), then not recognizing any such drugs being held as inventory on the financial statements is misleading. INVENTORY TRACKING The two most typical inventory tracking systems are described as follows.