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Case Study Example: Managing Costs and Revenues

5 pages
1190 words
Carnegie Mellon University
Type of paper: 
Case study
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The case study is about budgeting. The Administrator of the Radiology Department of a hospital is required to develop the capital budget for the fiscal year 2015. The department has $1 million as the capital budget. The administrator has to make a decision on whether to purchase a new state of the art mammogram or an MRI tube. The mammography department has won awards for its outreach programs to the poor and low-income women. Notably, the two devices cost $800, 000 each.

The main problem is to determine the right balance in the investment of resources. The administrator faces the challenge of committing the budget allocation in a manner likely to be consistent with the departments objectives. It is worth noting that the financial goal of for-profit organization is to administer the assets of the organization in such a manner that creates greater wealth for the shareholders. To this end, the aim is normally to maximize earning either through savings or increasing profitability, and reducing the possibility of risk to the lowest possible levels. On the other hand, the department has the responsibility to the stakeholders, which in this case are the patients. The duty to the patients encompasses producing the best outcome by providing optimal care for the patients in a way that reflect efficiency (85). In the case study, it is evidently difficult for the administrator to make a decision on two competing projects. Purchasing the MRI tube equipment ensures greater profitability while buying the mammography device portends better social and community services. Purchasing the digital mammogram means that the administrator is incorporating the poor and low-income women into the hospitals objectives. Upgrading the MRI tube will only serve to improve the MRI departments efficiency, which subsequently would increase the earnings. The initial option will serve the interests of both the stakeholders and the shareholders, while the latter would leave out the community.

Under the circumstances, the best method to use in decision-making is the Activity-Based Costing or the ABC Method. It is essential and relevant in this case because in the contemporary setting the allocation of costs is based on cost drivers or the activities during preparation and during the unit of service (Zeiler 196). The suggested method is normally based on the assumption that activities consume resources and the products stem from activities. Therefore, controlling the processes and the activities will obviously have a positive bearing on the costs. To this end, purchasing the MRI machine or the mammogram is dependent upon the activities complete the entire process. It is worth noting that any procedure or process consumes overhead resources. Therefore, the objective is to understand all the activities required in the acquisition of the equipment in question.

The additional data required before making the decision is the cost of the overheads, as such increase the cost significantly. It is imperative to narrow down the activities to the once that influence the overhead cost in immense ways. Some of the overhead costs or information includes the cost of the spare parts, setting up the machines, assembling the product, running costs, and the cost of inspection (Zeiler 196). In addition, the administrator should gather information on the availability of the office space to set up the equipment and the prediction of the rate of depreciation of the mammogram and the MRI machine. The other relevant information in this regard, is the determination of the cost drivers that may include quality control and the activities during the use of the equipment.

The main challenge includes the possible increment in the cost of the chosen equipment due to overhead costs. In essence, there will certainly be a difference in the perceived cost and the actual costs. For example, the MRI machine and the mammogram may have the same purchasing price, but the costs more to install the latter. The additional costs may stem from the installation fees, the time spent on the acquisition process, and the other opportunities forgone (197). For example, after purchasing the equipment, there will be the additional costs such as transportation, installation fees, and the cost of operation, which involve consumption of electricity. In order to convince the management, the administrator ought to do a proper break-even analysis to determine the viability of the entire process. Moreover, the administrator will have to explain to the management the legal implications of the bought machine. The government provisions require the device management to meet the stipulated care quality standards. The administrator will have to explain to the management the reasons why he settled on particular equipment and if the purchased devise actually gets to the heart of the problem in entirety.

It is important to employ various strategies aimed at motivating the employees through the provision of sound and acceptable leadership. The first, strategy is to provide training to the employees since the equipment are quite new and may require a different set of skills. Training and documentation of skills form part of the specific privileges (Zeiler 217). For example, when a physician want to use specific equipment for example the mammogram device it is useful to train them on the use of the device for a specific period as means of improving their expertise in the procedure. In order to avoid legal issues, the hospitals should carry out serious research on the physician. The second, strategy is to foster teamwork. The first step is to create a committee of a taskforce with a specific mandate (290). In this case, the committees mandate will be to examine the safety of the patients during and after undergoing treatment using either the MRI machine or the mammogram. Applying future thinking strategies is quite motivational. The hospital should provide various growth opportunities for growth for the physicians. The prospects of growth will make the physicians work with unmatched dedication. Promoting from within is a great pillar of this strategy. In cases when the individuals to be promoted lack a particular set of skills then training them is the only viable option rather hiring form outside (290). Cultivating a-promote-from within culture is quite helpful in boosting he employees morale. Finally, there is need to foster teamwork (288). The teams should be well balanced in terms of experience to ensure that the new employees learn from the more skilled or experienced ones. Such an arrangement permits the passing of knowledge and skills. Encouraging the departments to work as a team will foster unity and lessen the effects of choosing to either purchase a mammogram or MRI device since both of them will access to the equipment.

As the administrator, I would purchase the mammogram device. The fact that the mammography Department received praise for their work in uplifting the poor and low-income women means that they are using whatever resources at their disposal to improve lives and build the hospitals reputation among the members of the community. Rewarding excellence will encourage the other departments to utilize the resources availed to them in ways that can attract more investments. The department therefore deserves additional investment since it utilizes whatever resources at their disposal to ensure maximum care to the members of the community (85).



Zeiler, K., D. Managing Costs and Revenue. Pg 184-297


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