PROBLEM B-5 Interpreting Common Practice [LO1] In practice, many organizations measure the relative profitability of their segments by dividing the segments' margins by their revenues. The segment margin for this purpose is the segment's revenue less its fully allocated costs-including allocations of fixed common costs. For example, a hospital might compute the relative profitability of its major segments as follows: St. Ignatius Hospital Profitability Report (in thousands of dollars).
PROBLEM B-5 Interpreting Common Practice [LO1] In practice, many organizations measure the relative profitability of their segments by dividing the segments' margins by their revenues. The segment margin for this purpose is the segment's revenue less its fully allocated costs-including allocations of fixed common costs. For example, a hospital might compute the relative profitability of its major segments as follows: St. Ignatius Hospital Profitability Report (in thousands of dollars).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Qq.17.
![PROBLEM B-5 Interpreting Common Practice [LO1]
In practice, many organizations measure the relative profitability of their segments by dividing the
segments' margins by their revenues. The segment margin for this purpose is the segment's revenue
less its fully allocated costs-including allocations of fixed common costs. For example, a hospital
might compute the relative profitability of its major segments as follows:
St. Ignatius Hospital
Profitability Report
(in thousands of dollars)
Revenue.....
Fully allocated cost
Margin
Profitability (Margin Revenue)...
Emergency
Room
$10,630
10,060
$ 570
5.4%
Surgery
Acute Care
$21,470 $18,840
21,090
18,550
$ 380
$ 290
1.5%
1.8%
Total
$50,940
49,700
$1,240
2.4%
The hospital's net operating income for this period was $1,240,000.
Required:
1. Evaluate the use of the margin, as defined above, in the numerator of the profitability measure.
Evaluate the use of revenue in the denominator of the profitability measure.
2.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8f6b9bf3-9222-4e20-9362-1764c39421ae%2Fb9727213-cda6-4b26-9f94-7d3818843557%2F1ck2l1a_processed.jpeg&w=3840&q=75)
Transcribed Image Text:PROBLEM B-5 Interpreting Common Practice [LO1]
In practice, many organizations measure the relative profitability of their segments by dividing the
segments' margins by their revenues. The segment margin for this purpose is the segment's revenue
less its fully allocated costs-including allocations of fixed common costs. For example, a hospital
might compute the relative profitability of its major segments as follows:
St. Ignatius Hospital
Profitability Report
(in thousands of dollars)
Revenue.....
Fully allocated cost
Margin
Profitability (Margin Revenue)...
Emergency
Room
$10,630
10,060
$ 570
5.4%
Surgery
Acute Care
$21,470 $18,840
21,090
18,550
$ 380
$ 290
1.5%
1.8%
Total
$50,940
49,700
$1,240
2.4%
The hospital's net operating income for this period was $1,240,000.
Required:
1. Evaluate the use of the margin, as defined above, in the numerator of the profitability measure.
Evaluate the use of revenue in the denominator of the profitability measure.
2.
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