Background Elder Services is a not-for-profit organisation that has three departments housed in one location, in addition to the headquarters housed in an adjoining building. The organisation provides services for elderly clients who are still living at home. One department provides meals, one department provides cleaning services, and one department provides health care services. Elder Services relies on client fees and a small grant from the Federal Government to provide services. Following are the results from last year’s operations. Table 1 – Departmental Income Statement for year ended 30th June 2010 Departments Meals Cleaning Health Total Visits 10 000 10 000 10 000 30 000 $50 000 $100 000 $150 000 $300 000 Revenues Variable cost 30 000 50 000 120 000 200 000 (labour &supplies) Variable 5 000 2 000 5 000# 12 000 transportation Fixed 5 000 10 000 15 000 Transportation* Fixed costs (other)% 4 000 8 000 12 000 24 000 Allocated HQ cost 10 000 20 ...view middle of the document...
In light of these changes, the managers of Elder Services are trying to decide how to balance the budget.
Your consulting firm, HBC110 Consulting, has been employed by Elder Services to assist with a financial analysis of its operations. The objective of the anlaysis is to provide guidance to management on how best they can balance the budget. As part of your analysis your manager at HBC110 Consulting, has requested the following specific information be incorporated into your report: 1. The contribution margin per visit for each department together with a brief discussion on how this information can be used by Elder Services. 2. A contribution margin income statement showing the total contribution from each department. You should discuss how this contrasts with the information provided in Table 1 above regarding the “profitability” of each department. 3. A discussion on how the allocation of headquarter costs is impacting on individual department profitability. 4. Three proposals have been suggested to overcome the funding problems. The report needs to show the financial analysis, together with a discussion of any qualitative factors that the managers of Elder Services need to consider in making any decision in relation to the three independent options. a. Closure of the health services department. Elders have advised that there is no alternative uses planned for the health services space and no change would occur in headquarter’s costs. b. Increasing the number of cleaning services’ clients by 2000, and assuming no changes in fixed costs. c. Closing the meals division and leasing the space to another organisation for $2000 per month. 5. Refer to (4) above, discuss how you may go about acquiring the qualitative information. 6. Elders’ management have expressed concern that the current cost allocation system being used by the entity may not reflect resource usage by the individual departments. Briefly comment based on data provided in Table 1 above. Include a diagram showing the structure of the current cost allocation system. 7. As an alternative discuss whether a costing system based on activity cost pools would be more appropriate. Develop a model activity costing system that may be appropriate for Elders.