Hopkins Community Hospital operates an outpatient clinic in a town several miles from the main…

Hopkins Community Hospital operates an outpatient clinic in a town several miles from the main hospital. For several years the clinic has struggled just to break even. The clinic’s financial budget for 20X7 is shown in Exhibit 8.12. On the average, billings for each patient-visit are expected to be €180. Costs in 20X7 are expected to average €183 per patient-visit, as follows:

The clinic is generally staffed by one physician who must be present whether or not there is a patient to see. Currently, about 10 per cent of the physician’s time is idle. The clinic employs nurses and technicians to meet the actual workload necessitated by patient appointments. Their cost averages €30 per hour and usage varies proportionately with the number of patient-visits. Supplies cost is also variable with respect to patient-visits. Fixed overhead in 20X7 was expected to be €180,000; the remaining €72,000 of overhead varies with respect to patient visits. Included in the fixed overhead was €30,000 of hospital-wide administrative costs that the hospital allocates to the clinic and €37,500 of depreciation on the clinic’s property and equipment.

Cindy Ryden, controller of Hopkins Community Hospital, reported the actual loss of €20,200 in 20X7 shown next. This represented the fifth straight year of losses. She does not feel it is right for patients in the main hospital to subsidise those using the clinic. Therefore, she suggested that unless the situation could be changed, the clinic should be closed. Brett Johnson, administrative vice president of the hospital, charged with oversight of the clinic, disagreed: ‘We provide a valuable service to the community with the clinic. Even if we are losing money, it is worthwhile to keep it open.’

At the end of 20X7, the clinic’s actual results for the year were as follows:

1 Would Hopkins Community Hospital have saved money in 20X7 if the outpatient clinic was closed? Explain.

2 Explain the difference between the budgeted loss of €12,000 and the actual loss of €20,200 (that is, the static-budget variance of €8,200) in as much detail as possible. From the analysis of the 20X7 results, what actions would you suggest to avoid a loss in 20X8?

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