Rio Grande Medical Center: Case 3

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Case 3 Report

1. Background Rio Grande Medical Center is a full service not-for-profit acute care hospital with 325 beds. Most of the hospital’s facilities are devoted to inpatient care and emergency services, but a 100,000-square-foot section of the hospital is devoted to outpatient (OP) services. Of the 100,000-square-foot OP section, the OP Clinic uses 80%/80,000-square-feet, and the remaining 20%/20,000-square-feet are used by the Dialysis Center. Increased patient volume at the OP Clinic has created a need for 25% more space than it is currently assigned. Due to its large size and patients’ need to access other departments the decision has been made to move the Dialysis Center to another location, and allow the OP Clinic to
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After receiving the P&L Statement covering expansion, the administrative resident must develop and justify a new indirect cost allocation scheme for outpatient services. The scheme must be perceived as fair and promotes overall cost savings within the Medical Center.
2. Facts a. Current P&L Statement (without expansion)
(1) The Dialysis Center
Under the current indirect cost allocation scheme (Exhibit 1) the Dialysis Center’s Revenues and Direct Costs are as follows: total revenue is $2,700,000, direct expenses are $2,100,000, the contribution margin is $600,000, and their percent of revenues is 22.2%. Their indirect costs are as follows: facilities cost is $300,000, general overhead is $270,000, and total overhead is $570,000. This leaves the Dialysis Center with $30,000 in net profit and 1.1% in percent of revenues. Additionally, square footage is allocated at $15.00 per square foot on an aggregated basis. Lastly, their general overhead costs are set at 10% of their total revenues. (2) The OP Clinic
Under the current indirect cost allocation scheme (Exhibit 1) the OP Clinic’s Revenues and Direct Costs are as follows: $16,000,000 in total revenues, $9,833,155 in direct expenses, $6,166,845 in contribution margin, and 38.5% in percent of revenues. Their indirect costs are as follows: $1,200,000 in facilities costs, $1,600,000 in general overhead, and $2,800,000 in total overhead. This leaves the OP
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