Bellaire Clinical Labs, Inc. Case free essay sample

1. Prepare a budgeted income statement for 2003 based on the information. You may want to re-list your assumptions. What additional assumptions did you have to make, if any? Bellaire Clinical Labs, Inc. Budgeted Income Statement For the year ended in 2003 Sales Routine test Physician pays $5,600,000 Patient pays 2,720,000 Other parties pay 3,840,000 Total Routine test 12,160,000 Specialty test Physician pays 2,000,000 Patient pays 920,000 Other party pays 1,320,000 Total Specialty test 4,240,000 Total Sales 16,400,000 Cost of Sale Direct material 2,700,000 Direct Labor 4,430,400 Depreciation Expense 3,500,000 Other Variable Overhead 806,000 Other Fixed Overhead 300,000 Total Cost of Sales 11,736,400 Gross Profit $4,663,600 General and Administrative Expenses Salaries and Bonuses Expenses 700,000 Billing and Collection Expenses 1,850,000 Advertising and Promotion 820,000 Other Administrative Expenses 500,000 Total General and Administrative Expenses 3,870,000 Net Income $793,600 ? Assumptions to budgeted income statement: Number of test per year 1,000,000 % test, routine80% % test, specialty20% % test paid for by physician50% % test paid for by patient20% % test paid for by other parties30% Price, routine test When physician pays $14. 00 When patient pays . We will write a custom essay sample on Bellaire Clinical Labs, Inc. Case or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 00 When other party pays $16. 00 Price, specialty test When physician pays $20. 00 When patient pays $23. 00 When other party pays $22. 00 Direct material $2. 70 Direct labor(annual labor hours 2,080) Routine test 140 Employees @ $8. 5 Specialty test 50 Employees @ $19. 50 Depreciation Expense (3,200,000) + (3,000,000/10) =3,500,000 Overhead Fixed $300,000 Overhead Variable ((1,000,000 x 1. 106) – 300,000) = $806,000 Billing and collection expense When physician pays$ . 50 When patient pays $3. 50 When other party pays $3. 00 Advertising and Promotion $820,000 Salaries and Bonuses Expenses $700,000 Other Administrative Expenses $500,000 2. What issues would you bring up with Wilma Lands? Why? I would discuss with Wilma Lands the following issues: 1. Sale price- there is several factors that affect the sales price of test which the company cannot control. Some of these factors are control cost on test price by healthcare organizations, limited ability to influence the price paid for testing services provided to Medicare and Medicaid beneficiaries, and increase in competition due to new laboratories in the area. 2. Competition increase in the Boston metropolitan area due to the well-known for its high concentration of exemplary physicians and hospitals. 3. Redirect their services to more specialized laboratories services. They could research the laboratory services that are increasing in the area and try to add additional services that are not performed by other laboratories. 4. Cost reduction strategy may need to be implanted since there are external factor that are affecting the sale price. 3. Was Marty Walters’s material cost per test of $2. 70 in 2003 reasonable? How could such a cost reduction be achieved? Yes, I think is a reasonable amount to use $2. 70 for material cost per test. Walters’s could achieve the cost reduction by buying bigger volumes instead of buying for individual units. Also, Walters may begin to buy in bulk. Bulk buying will results in annual contracts for a period of twelve months with a fixed prices for the entire period. Another strategy for cost reduction could be the Walters identify if the material cost per test has seasonal cycle of prices. Hence the company can buy maximum amount of material requirement when prices are low. In addition, cost reductions can be achieved utilizing different approaches. Walters and Mack may decide to use other methods to reduce cost they can: 1. Reduce existing expenses 2. Eliminate unnecessary expenses 3. Modify business strategies 4. Replace higher expenses with lower expenses for same items The importance of cost reduction strategies cannot be understated, especially when a company is struggling to maintain profitability. Areas that can be reviewed for expense reductions include the following: 1. Advertising and promotion 2. Billing and collections 3. Other administrative expense If the company must generate more cash as fast as possible, management will have to decide which costs can be most effectively reduced. If the reduction is needed quickly, expenses cut first will normally be those that are not ixed or directly tied to test production. It is not a good idea to drastically reduce expenses that may affect the service of the company without careful evaluation. Cost may be viewed as the point of departure or starting place in product pricing (Bragg, 2009, pag. 330). Walters could use the cost reduction to adjust price to be more competitive or to increase the company profits. 4. What benchmarks should Bellaire use to gauge the reasonableness of the budget? Name some companies that Bellaire might want to compete with. ? Reference Bragg, S. M. (2009). Controllership. New Jersey: Wiley.