Calculate Profit And Loss Position In A Firm

Question

The Adelaide Private Hospital has 3 patient services departments – Adult Medicine, Obstetrics and Pediatrics. It also has 3 patient support departments – administration, Facilities and Finance. The revenues of the three patient services departments are:

Adult medicine           $12 million

Obstetrics                    $6 million

Pediatrics                    $2 million

The direct costs of all 6 departments are:

Adult medicine           $6 million

Obstetrics                    $3.6 million

Pediatrics                    $1.2 million

Administration            $1 million

Facilities                      $4.4 million

Finance                        $1.8 million

Direct costs of the support departments are allocated to patient services departments using the direct method on the basis of the % of services provided by the support departments to the patient service departments. Table 1 below gives the percentages of support provided by the support departments to both each other and the services departments. For example, 10% of admin’s services are provided to the finance department and 20% to obstetrics.

1. Allocate the support department overheads to the 3 patient service departments on the basis of the % of services provided.
2. Calculate the profit and loss position for each of the patient service departments and the hospital as a whole.
3. Should the hospital consider closing down any or all of the patient service departments to increase its profitability or reduce its losses? Explain why or why not.

Summary

The question belongs to Finance and it discuses about calculating profit and loss position and closing down any departments to increase profitability in a hospital.

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