Question 1 (8 marks)
A hospital is expecting to have $25,000 cash in hand on 1st April 2015 and it requires you to prepare an estimate of cash position in respect of three months from April to June 2015, from the information given below:
Patient services Purchases Wages Expenses
February 70,000 40,000 8,000 6,000
March 80,000 50,000 8,000 7,000
April 92,000 52,000 9,000 7,000
May 100,000 60,000 10,000 8,000
June 120,000 55,000 12,000 9,000
Additional Information:
(a) The hospital pays for purchases two months after the purchase.
(b) 25% of patients pay in cash in the month they receive their treatment and the others pay in the following month.
(c) Both wages and expenses are paid in the following month in which they are incurred.
(d) Income Tax of $25,000 is to be paid in June 2015.
Required:
- Prepare a cash budget for April, May and June and also for the 3 months to 30 June.
- Are there any changes you can suggest to improve this hospital’s cash flow?
Question 2 (6 marks)
The Dandenong Hospital is considering purchasing two independent pieces of medical equipment having the following cash flow streams:
Year Machine A Machine B
0 -$50,000 -$40,000
1 +20,000 +20,000
2 +20,000 +10,000
3 +10,000 +5,000
4 +5,000 +40,000
5 +5,000 +40,000
The Hospital uses a combination of the net present value approach and the payback approach to evaluate its equipment purchases. It requires that all equipment have a positive net present value when cash flows are discounted at 10 percent and that they have a payback period no longer than 3 years. Which machine or machines should the Hospital buy? Why?
Question 3 (6 marks)
A hospital has a choice between two mutually exclusive alternatives, each requiring an initial outlay of $25,000. Machine A promises cash flows of $2,000 the first year; $2,000 the second year; and $35,000 the third year. Machine B offers $21,000 the first year; $10,000 the second year; and $2,000 the third year. The required rate of return is 8%. Calculate the NPV and the IRR for each machine. Which of these two mutually exclusive alternatives should be accepted?
Question 4 (15 marks)
The Prince Alfred Hospital’s projected revenue and costs for the 2015 financial year – ending 30 June – are as follows:
Projected revenues and costs by patient services departments:
Revenues Costs (direct)
Routine care $30 million $15 million
Laboratory $10 million $8 million
Radiology $6 million $3 million
Overhead costs from the support departments in the Hospital are:
Financial services $3 million
Maintenance $5 million
Housekeeping $2 million
Administration $4 million
Personnel $4 million
The agreed cost drivers for the support departments are:
Financial Services patient revenue
Maintenance space utilisation
Housekeeping labour hours
Administration salary dollars
Personnel salary dollars
The following information relates to the patient services departments:
| Department | Space utilisation | Labour hours | Salary dollars |
| Routine care | 199,800 sq.m. | 76,000 | $10 million |
| Laboratory | 39,600 sq.m. | 6,000 | $3 million |
| Radiology | 61,200 sq.m. | 9,000 | $2 million |
| Total | 300,600 | 91,000 | $15 million |
- What is the Hospital’s projected profit or loss for the year?
- Allocate indirect costs to the patient services departments on the basis of the cost drivers specified.
- Do you think that the allocation method used was appropriate? Explain why or why not?
- Are all the patient services departments profitable? If not, should they be closed down?
Question 5 (10 marks)
It is now May and you have been asked to do a budget for The Flu Shot clinic as the flu season will soon begin. The clinic will operate for the months of June and July. As the hospital has no spare space it will rent a room in a nearby shopping centre for the clinic. The clinic will also employ a nurse to give the injections and a receptionist to assist with arranging interviews. Vaccines cost $10 per patient. In addition, the clinic will give each patient either regular or glow-in-the-dark band aids. A regular band aid is budgeted at $1, while a glow-in-the-dark band aid is budgeted at $2. Children always request glow-in-the-dark band aids. It is anticipated that the clinic will receive $40 for each child and $30 for each adult. During last year’s flu season, the department saw 400 adults and 700 children each month and operated for 2 months.
The nurse is paid $5 per child and $3 per adult and the receptionist is paid $500 per month. Rent and utilities are $300 per month.
- Using this information do a budget for the clinic for June and July.
- The actual results for this clinic are shown below. Management want to know why the budgeted result and actual results for each month are different. Do a budget variance analysis for each month to identify what caused the actual and budgeted amounts to be different. You are told that in June the clinic actually saw 500 adults and 900 children, and in July the clinic saw 200 adults and 500 children.
- Write a brief report to your manager summarising your findings and give recommendations for how to prepare the budget for next year.
Actual results
June July
Revenue 51,000 26,000
Costs
Vaccines 16,800 8,400
Band aids 2,750 1,450
Rent 400 400
Receptionist 500 600
Nurse 6,000 3,100
Total cost 26,450 13,950
Profit 24,550 12,050
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