Posted: August 1st, 2016
Last year Trans Insurance (TI) entered the market and began offering lower cost health insurance to local firms. TI cut benefit offered and told Parkview that it would pay only a fixed dollar amount per patient. A typical firm could cut its health insurance premium by 20% by switching to TI. TI was successful at taking 45% of Blue Cross Blue Shield customers. These firms faced stiff competition and sought to cut their health care costs.
Parkview management estimated that its revenue would fall 6%, or $3.2 million, next year because TI’s lower reimbursement. Struggling with how to cope with lower revenues Parkview began complex process of deciding what programs to cut, how to shift the delivery of services from impatient to outpatient clinics and what programs to open to offset the revenue loss (for example open an outpatient depression clinic).Management can forecast some of the costs of the proposed changes, but many of its cost and revenue (such as the cost of admissions office) have never been tracked on the individual clinical unit.
A) Was Parkview’s accounting system adequate 10 years ago?
B) Is Parkview’s accounting system adequate today?
C) What changes should Parkview make in its accounting system?
3. Darien Industries
Darien industries operate a cafeteria for its employees. The operation of the cafeteria require fixed cost of $4,700 per month and variable cost of 40% of sales. Cafeteria sales are currently averaging $1,200.00 per month.
Darien has an opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machine is estimated to be 40% greater than current sales because the machines are available at all hours. By replacing the cafeteria with vending machines, Darien would receive 16% of the gross customer spending and avoid all cafeteria costs. How much does monthly operating income change if Darien replaces the cafeteria with vending machine?
4. Negative Opportunity Cost
Can opportunity costs be negative? Give an example.
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