Case Study: Big Bend Medical Cente

Is it fair for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose
his bonus, just because the Outpatient Clinic needs additional space? Provide justification for your position.

  1. In the past, the medical center aggregated all facility costs and then allocated the total amount on the basis
    of square footage. This methodology assigned an average cost rate to each patient service department,
    regardless of whether its space is new or old, prime or poor. The proposed allocation for the Dialysis Center, on
    the other hand, requires it to bear the true facility costs of its new space.
    What are the advantages and disadvantages of the new methodology?
    Do you support the new allocation scheme? Provide justification for your position.
  2. If the new allocation method for facility costs is implemented, what should be the facility allocation to the
    Dialysis Center in 20 years, when the loan (which is the basis for the higher cost allocation) has been paid off
    and there are no longer any actual facility costs? Provide justification for your position.
  3. Explain how the revenue from medical (pharmacy) supplies is currently handled for profit and loss reporting
    Is there a problem with the current system?
    Is there a better way of reporting this revenue? Explain.
  4. When all issues related to the decision are considered, what is your recommendation regarding the final
    allocation amounts? Provide justification for your recommendation
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