Problem 1. The estimation of the base cost per option.
Alternative number 1
Cost of three machines: 3*75000 = 225000
Machines annual maintenance costs: 3*500 = 1500
Activity Cost detail on the basis of 2400 procedures per annum
Scheduling of appointment; 3 minutes * 0.2 * 2400 = $1440
Receptionist time; 5 minutes *0.2* 2400 = $2400
Ultra-sound examination: Specialist time; 45 *$ 0.40 * 2400 = $43200
Practitioner time; 1.5 minutes *3.00*2400 = $10800 but there is testing time for every 10 patients;
Therefore, cost is;
Cost per patient (1/10*2400) *3.00 = $720
Total cost of the 10 patients = 720*10 = $7200
Materials used in each technique; 1 package *9.00* 2400 = $21600
Patient check-out: 5 * $0.20 * 2400 = $2400
Picture Development; Specialist time; 10m *0.40*2400 = $9600
Picture reading; Radiologist: 2400* $40* = $96000
Invoicing and collection; 2400*6.80 = $16320
General administration costs; 2400* 1.25 = $3000
Total annual activity costs = 1440+2400+43200+10800+7200+21600+2400+9600+96000+16320+3000
= $ 213960
Total annual costs = total annual activity cost plus annual maintenance costs;
= 213960 + 1500 = $215460
Activity costs for the entire machine life of 5 years; $213960*5 =$1069800
Maintenance costs for 5 years; $1500* 5 = $7500
Cost of machines; $225000
Total cost alternative 1; 1069800 + 7500 + 225000 = $1302300
Cost of a single procedure = 1302300 / (2400*5) = $108.53
Alternative number 2
Cost of machine = $ 75000
Van purchase cost = $40000
Van and machine maintenance costs per annum = $2000
Activity Cost detail on the basis of 2400 procedures per annum
Conveyance and setting-up cost; 6 minutes* 1 * 2400 = $14400
Scheduling of appointment; 3 minutes * 0.2 * 2400 = $1440
Receptionist time; 5 minutes *0.2* 2400 = $2400
Ultra-sound examination: Specialist time; 45 *$ 0.40 * 2400 = $43200
Practitioner time; 1.5 minutes *3.00*2400 = $10800 but there is testing time for every 10 patients;
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Therefore, cost is;
Cost per patient (1/10*2400) *3.00 = $720
Total cost of the 10 patients = 720*10 = $7200
Materials used in each technique; 1 package *9.00* 2400 = $21600
Patient check-out: 5 * $0.20 * 2400 = $2400
Picture Development; Specialist time; 10m *0.40*2400 = $9600
Picture reading; Radiologist: 2400* $40* = $96000
Invoicing and collection; 2400*6.80 = $16320
General administration costs; 2400* 1.25 = $3000
Total annual activity costs =
14400+1440+2400+43200+10800+7200+21600+2400+9600+96000+16320+3000
= $ 228360
Total annual costs = total annual activity cost plus annual maintenance costs;
= 228360 + 2000 = $230360
Activity costs for the entire machine life of 5 years; $228360*5 =$1141800
Maintenance costs for 5 years; $2000 * 5 = $10000
Cost of machine = cost of machine + van cost
= 75000 + 40000 = $115000
Total 5-year cost for alternative 2: 1141800 + 10000 + 115000 = $1266800
Cost per procedure = 1266800 / (2400*5) = $105.57
Question 2. Alternative with the lowest cost
Total cost for 5 years; Alternative 1 $1302300 alternative 2, $ 1266800.
Total annual cost; Alternative 1 $ 215460, alternative 2, $230360
Cost per procedure Alternative 1 $108.53, alternative 2, $ 105.57
Alternative 2 has the lowest cost in terms of the total cost for five years and the cost per procedure, except annual charge, which is higher than alternative 1. Therefore, overall alternative 2 has the lowest value between the two alternatives.
Question 3. Value for travel and set-up costs
For alternative 2 to match alternative one cost, the set cost up is equal to the difference between the two costs;
1302300 – 1266800 = $35500
Question 4. Impact of the 5% discount
The total cost of the three machines without discount = $225000
Application of discount, total cost = 95%*225000 = $213750
Total 5-year cost for alternative 1 change to: 1069800 + 7500 + 213750 = $1291050
Cost per procedure = 1291050 / (2400*5) = $107.59
The discount has had no major impact on the decision since alternative two remain low on total cost and cost per procedure even with the discount amount factored.
The amount of discount to equate the total costs of the two alternatives:
5% * 75000*3 = $11250
5% resulted in a discount of $11250
Difference in the two alternatives total cost = 1302300 – 1266800 = $35500
Then if 5% results to 11250, 35500 is equal to what discount percentage;
(35500/11250) * 5 % = 15.78%
Discount must be 15.78%
Question 5. Subjective factors to influence decision
In health care, the comfort and flexibility to the client's schedule play a significant role in making key decisions (Sawalha et al., 2020) . Though costs are a major consideration, alternative two does not provide patients with the flexibility required. If the number of patients was to rise drastically, there are chances of others missing the procedure due to the inflexibility of the van. The van has to attend to all three locations, and chances are over time wear and tear will eventually catch up and interrupt service offering in all three locations.
Question 6. Final decision
In consideration of factors such as flexibility and longevity of the machines besides flexibility to the patient's schedule, alternative 1 fits the description (DeMichiei, 2020) . Excluding the cost of machines, the alternative offers a lower annual charge, which comprises of activity costs and maintenance costs. Moreover, there are discounts offered on machines which in future could rise, providing an additional opportunity to lower costs. Therefore, the task force would recommend option 1 for Panhandle Medical Practise.
References
DeMichiei, R. (2020). Activity-Based Costing in Healthcare Saves Millions . Health Catalyst.
Retrieved 26 June 2020, from https://www.healthcatalyst.com/success_stories/activity-based-costing-in-healthcare-service-lines-upmc .
Sawalha, R., Ide, S., & Erkan, Ç. (2020). Factors Affecting the Decision-Making Process in
Healthcare Institutions . Questia.com. Retrieved 26 June 2020, from https://www.questia.com/library/journal/1P3-3965362961/factors-affecting-the-decision-making-process-in-healthcare .
