You first are curious about what the projected net income would be for both the routine care and orthopedics departments after the move. You know this move may have a big impact on your bonus. Using Table 18-6 and Table 18-7 expansion allocation 1, allocate the indirect expenses to both the routine care and orthopedic care departments. Once allocated, you will be able to determine the projected net income for both departments.Interpreting the results from question 1, do you think the cost allocation method of using revenue as a cost driver is a “fair” allocation method? Why or why not?Again, using Table 18-6 and Table 18-7, allocate the indirect expenses based on the square-footage after the expansion. (Routine Care = 50,000 SqFt and Orthopedics = 25,000 SqFt).Now interpret the results from question 3. Is this a “fair” allocation method? Why or why not? The construction cost of the new building is estimated to be $100 per square foot. This brings the cost of construction to $100 x 25,000 = S2,500,000. There will be an additionalcost of $1,250,000 for items such as equipment, furniture, and relocation costs. This brings the total move cost to the orthopedic department to $2,500,000 + $1,250,000 =$3,750,000. TABLE 18.6 shows the estimated new revenues and expenses for both departments once the move is completed. Because We Care Medical Center is a nonprofitand serves the community, the hospital was able to obtain a no-interest economic development loan which will be paid back in equal payments of $187,500 over the course of 20years.TABLE 18-6 We Care Medical Center Statements of Revenue and Expenditures Allocation Rates DeterminationRevenuesRoutine care$2,650,00050,000SgftOrthopedics$1,550,00025,000SqFtTotal revenue$4,200,00075,000SqftDirect ExpenseSalaries and benefits$2,731.500Supplies$627,300Total direct expenses$3,358,800AllocationAllocationRate 1Rate 2Indirect ExpensesFacilities expense$ 504,000$0.12$6.72*General overhead$ 210,000$0.05$ 2.80Total indirect expenses$ 714,000Net income$ 127,200 The hospital is considering using the revenue allocation method and the square footage allocation method for the new building. The rates are shown in Table 18-6, with thecalculations under the revenue method show as Allocation Rate 1 and the square footage method shown as Allocation Rate 2. The results of the two allocation rates for theexpansion are shown in TABLE 18.7.TABLE 18-7 We Care Medical Center Statements of Revenue and Expenditures Under Various Allocation MethodsAllocationsAlternativeWithoutExpansionExpansionExpansionAllocations 1Allocations 2Routine CareOrthopedicsRoutine CareOrthopedicsRoutine CareOrthopedicsRevenues$2,050,000$1,301,000$2,650,000$1,550,000$2,650,000$1,550,000Direct ExpensesSalaries and benefits$1,350,000$900,000$1,687,500$1,044,000$1,687,500$1,044,000Supplies$306,000$204,000$382,500$244,800$382,500$244,800Total direct expenses$1,656,000$1,104,000$2,070,000$1,288,800$2,070,000$1,288,800Indirect ExpensesFacilities expense$205,000$130,100$318,000$186,000$336,000$168,000*General overhead$102,500$65,050$132,500$77,500$140,000$70,000Total indirect expenses$307,500$195,150$450,500$263,500$476,000$238,000Net Income$86,500$1,850$129,500($2,300)$104,000$23,200*Accounting, human resources, & technology support.

Cost allocation is a process of calculating the total cost of a company and then suitably dividing…

Answered: You first are curious about what the…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q