Public Financial Management ** 602 Ashford University **

See the two questions and review the totality of the question to ensure full credit for the answer….

Allocation of Costs I Analyze the following scenario: Jump Hospital currently allocates all maintenance department costs based on departmental square feet. However, the manager of the pharmacy department has suggested that an ABC approach be used for the portion of the maintenance department costs that relate to repairing equipment. Her contention is that the pharmacy has relatively little equipment that breaks. However, it must subsidize many high-tech departments that require expensive equipment repairs. Using the tables below, calculate the maintenance cost assigned to the pharmacy using the existing method and using an ABC approach. Clearly label your calculations in your analysis.

Maintenance Costs

Routine Maintenance Repairs Total Volume (Square Feet) 100,000 800 Labor Hours 10,000 4000 14,000 Labor Cost/Hour $12.00 $18.00 $13.71 Supplies $20,000 $80,000 $100,000 Administration $15,000

Department Information

Pharmacy All Other Departments Total Square Feet 2,000 98,000 100,000 Volume of Repairs 3 797 800 Hours of Repairs 6 3,994 4,000 Supplies Used for Repairs $200 $79,800 $80,000

II Analyze the following scenario: Duncombe Village Golf Course is considering the purchase of new equipment that will cost $1,200,000 if purchased today and will generate the following cash disbursements and receipts. Should Duncombe pursue the investment if the cost of capital is 8 percent? Why? Clearly label your calculations in your analysis.

Year Cash Receipts Cash Disbursements Net Cash Flow 1 1,000,000 500,000 500,000 2 925,000 475,000 450,000 3 800,000 450,000 350,000 4 750,000 430,000 320,000

Attachments
Allocation of Costs.doc