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Stand Alone Project

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  1. The type of price elasticity applicable to open MRI services in Oakville County and two reasons on whether the price is likely to be elastic or inelastic.

Price elasticity refers to the proportional change in the either the quantity demanded or the quantity supplied due to proportional change in the price of a commodity. There are two types of price elasticity’s this includes; price elasticity of demand and the price elasticity of supply. Price elasticity of demand is a proportionate change in demand quantity due to a proportionate change in price. On the other hand, price elasticity of supply refers to a proportionate change in supply quantity due to a proportionate change in price of a commodity or service. In the case, of the proposed opening MRI services in Oakville county price elasticity of demand is the most suitable type of price elasticity. This is because;

  1. At Oakville County, the proposed clinic will be the only MRI operations that will be open; as a result, the number of clients who will be in need of services to be offered to them will be on a rise.
  2. The open unit at Memphis is considered to be too far since it is 200 miles away; in addition, there are many MRI facilities that are closed.

Therefore, due to the high demand of for the medical services will enable Oakville MRI to offer it operations to the fullest.

  1. Four factors other than utility and managed care organizations that will influence the demand for MRI services.
  2. The open unit at Memphis is considered by the citizen to be too far, and as a result, opening of a hospital at Oakville County is a good idea towards the satisfaction of their demands.
  3. There are several MRI services; as a result, there are many people who are in need of more facilities to ensure satisfaction of their needs.
  4. At Oakville, there are many baby boomers this shows that there is a high demand for MRI services by such people.
  5. As a result of the shortages of radiology technologies that are needed to ensure staffing of the open MRI services there is the need to open one MRI service unit at Oakville County as it is believed that this has the highest level of neurology and radio group.
  6. Two factors that will influence the supply (other than utility and managed care organizations) of open MRI services.
  7. A price charged for the services is one of the factors that will influence the supply of MRI services. This is because, since the proposed MRI service unit will be the only one within that area, they will enjoy a monopoly thus setting prices for the services as they wish.
  8. Availability of substitutes is yet another factor that will influence the supply of MRI services at Oakville County. This is so because; there can be no substitutes for medical services it will enable the proposed unit to take advantage and offer services to the fullest.
  9. 5 potential impacts of the concept of utility for the demand for MRI services.

Utility can be defined as a measure of relative satisfaction. In addition, it refers to the total satisfaction that a consumer derives from consuming goods and services. Utility has significant impacts on demand for goods and services. In the case of MRI services, some of the potential impacts that can result due to utility include;

  1. It will ensure that quality services are offered to customers to ensure that they are satisfied, and no complaints are raised.
  2. It will ensure that priced are charged for the services offered to customers are in line with the quality of services and the customers ability.
  3. It will ensure that the proposed MRI clinic will be offering services in a timely manner according to the customers needs.
  4. It will ensure that customers who visit the MRI unit will not go back to their homes until all the medical services needs are satisfied.
  5. It will also lead to customer’s ability to compare the service quality between or among the existing firms. This will then lead to individual’s choice to obtain services from among competing service providers.
  6. 4 potential impacts of managed care organizations impact demand and supply.

Management in an organization is an issue of great concern. This is because; it has a significant level of impacts on the supply and demand of services. Some of the demand and supply impacts that will result from managed care organization include;

  1. Ability to employ staff that are qualified thus able to deliver quality services to customers.
  2. Ability to ensure that the available staff offers the necessary services to customers without wasting time and as per the customers requirements.
  3. It will ensure order in the hospital to avoid issues of low-quality jobs offered and complaints from customers.
  4. It will ensure that customers’ needs and demands are met accordingly.

Part B

  1. Pro forma income statement for 2004 and one flaw for the method

Adjustments

Years                                                  2002                2003                2004

Net patient service revenue               339,746           400,735           461,724

Other operating revenue                    15,149             16,839             18,523

Total operating revenue                     354,895           417,574           480,247

Salaries and benefits                          205,376           244,747           284,118

Supplies and others                            65,294             71,347             77,400

General support                                 31,062             35,803             40,544            

Depreciation                                      27,042             29,945             32,848            

Interest                                                          4,256               7,021               9,786              

Bad debt expense                              14,898             13,395             11,892

Total operating expense                     (347,928)        (402,258)        (456,588)

Income from operations                     6,967               15,313             23,659

 

 

Memphis hospital open MRI clinic (MHOMC)

Pro forma income statement

As at 2004

REVENUE

Net patient service revenue                           461,724

Add other operating revenue                        18,523

Total revenue                                                                        480,247

OPERATIN EXPENSES

Salaries and benefits                                      284,118

Supplies and others                                       77,400

General support                                             40,544

Depreciation                                                  32,848

Interest                                                                      9,786

Bad debt expense                                          11,892

Total operating expense                                                                    (456,588)

NET INCOME                                                                                 23,659

One possible flow with this method is that it is based on assumptions of the possible or expected income or revenue and expenses to be incurred.

  1. i. Preparing a budget statement for the year 2004.

Memphis hospital open MRI clinic (MHOMC)

Cash Budget statement

As at 2004

Cash balance at the beginning of the period                         417,571           457,115                     

Estimated receipts/cash inflows

Net patient service revenue                                                   60,989

Other operating revenue                                                       1,684

Total receipts                                                                         62,673             62,673                       

Total inflow expected                                                                                              519,788                     

Estimated cash payment/ outflows

Salaries and benefits                                                              284,118

Supplies and others                                                               77,400

General support                                                                     40,544

Depreciation                                                                          32,848

Interest                                                                                              9,786

Bad debt expense                                                                  11,892

 Total payment expected                                                       456,588           (456,588)                   

Estimated cash balance at the end of the period                                          63200

Adjustments

Inventory account

Balance brought down                      5,776

Increase in inventory                         1,573               Balance carried down                        7,349

                                                           7,349                                                              7,349

Accounts receivable

Balance brought down                      79,069

Increase in accounts receivable          21,168             Balance carried down                        100,237

                                                           100,237                                                          100,237

Accounts payable

                                                                                  Balance brought down                      26,457

Balance carried down                                    27,749             Increase in accounts payable              1,292

                                                           27,749                                                                        27,749

Other receivables account

Balance brought down                      5,950

Increase in accounts receivable          48                    Balance carried down                        5,998

                                                           5,998                                                              5,998

Accrued interest account

Balance brought down                      4,748               Increase in interest accrued    51

                                                                                  Balance carried down                        4,697

                                                           4,748                                                              4,748

  1. Statement of cash flow for 2004

Memphis hospital open MRI clinic (MHOMC)

Cash flow statement

As at 2004

Cash from operating activities

Earnings before tax                                       58,363

Add accrued interest                                            51

Less increase in inventory                             (1,573)

Less account receivable                                 (21,168)

Less other receivables                                                    (48)

Total cash from operating activities              35,625             35,625

Cash flow from investing activities

Less increase in bad debts                             (3,923)

Total cash from investing activities               (3,923)                        (3,923)

Cash flow from financing activities

Less increase in net assets                             (32,280)

Add decrease in net cash                              290

Total cash from financing activities              (31,999)          (31,999)

Change in cash                                                                         (297)

Analysis

Beginning cash                                  400,735

Cash change                                            (297)

Ending cash                                       400,438

 

 

 

  1. Ratio analysis using the information for the 2003 balance sheet and income statement.

a)      Profit margin ratio

=profit after tax/sales*100

=15,313/417,571*100

=3.67%

Profit margin ratio is a ratio that tries to measure sales profitability through out a year. It acts as a main indicator in measuring how efficient an operation is in terms of business ability to withstand falling prices, increasing costs and decrease in sales. In service providing industries, profitability margin can go as far as 10%, and in most cases, retail businesses have a profit margin ratio of around 3%. For the case of Memphis, its profit margin is 3.67%, and it is a requirement for the service providing industries to have a profit margin of up to 10%. In such a case, this unit should be investigated to the cause of low level of profit margin.

b)      Return on assets

=net profit/total assets*100

=15313/840357*100

=1.82%

Return on the asset is a ratio used to measure how a company efficiently utilizes its investment assets. In addition, it shows how much a company can be able to generate sales from disposal of it existing assets. In retail industries, return on assets is considered lowest when it is 0.8%, and at its highest when it is 3.2%. It is considered to be average when it is 1.9%. For the case of Memphis, it is at its average since its return on assets ratio is 1.82%. This shows that it can generate sales of 1.82 by disposing 1 unit of assets.

c)      Return on equity

=net profit/stockholders equity*100

=15313/227856*100

=6.72%

This ratio shows whether or not a business enterprise is making enough profits as compared with its resources, which the shareholders have invested. A high return on equity ratio shows that the business is performing well. This is because; in the case of Memphis investing a one percent of shareholders equity generates a return of 6.72%.

d)     Current ration

=current assets/current liabilities

=476128/70999

=6.71

It reflects the situation of a company’s working capital. In addition, it shows a company’s ability to pay short term creditors as a result of realization of a company’s current assets only. In this case, to pay short term creditors does not require a company to realize its fixed assets. Current asset ratio should be greater than one and the bigger the ratio the better. In the case of Memphis, its current ratio is 6.71 this shows that it has enough current assets required to pay for its current liabilities.

e)      Days cash on hand

=cash and cash equivalent/ (operating expense-depreciation/365)

=operating expense-depreciation

=402,258-29,945

=372,313/365

=1,020.03

=54,386/1,020.03

=53.31days.

This ratio shows the number of days a business can be able to use the cash in hand or the cash it has at the moment to pay its employees for the services offered. It gives a benchmark for all business sizes because it is a ratio that involves cash and expenses. There has been no set standard ratio amount however, businesses with a ratio of less than 10 days are considered risky. This is because; it can lead to delay in customer payment thus leading to interruption of business operation. In addition, if necessary percussions in such a case are not taken, then the business can easily run at a negative position. In the case of Memphis, its day’s cash on hand is 53.31 days. This shows that the business is secure as it can be able to pay its employees in a timely manner, hence no delays. In addition, it is able to carry on its operations comfortably without any interference.

f)       Debt to equity ratio

=total liabilities/owners equity*100

=70,999+7008/227,856

=78,007/227,856

=34%

This is a ratio that measures the proportion of equity and debts that are used to finance a company’s assets. It gives the relationship that exists between capital that have been contributed by the shareholders and that contributed by creditors. In situations where this ratio is high then it means that the company has aggressively financed its operations from debt. In this case, due to the interest that will be paid while repaying debts, there could be a significant negative impact on the businesses earnings. This ratio also gives an indication of the extent with which the shareholders equity can be able to fulfill a company’s obligation especially to creditors in situations where they have been liquidated. In case the ratio is greater than 1, then it means that a lot of the company’s assets have been financed through debts. If the ratio is less than 1, then it means that the company’s assets have been financed through equity. In the case of Memphis, its debt to equity ratio is 34% this means that it has financed it assets through equity. As a result, the business will not suffer a lot of costs in spending its money in for of interest to repay its debts.

g)      Fixed asset turnover

=net profit/fixed assets*100

=15,313/476,128*100

=3.22%

This ratio is useful in analyzing the level of growth by a company to determine whether its growth is assets based. If the ratio is low, then it means that the company’s fixed assets are becoming obsolete hence the need to be upgraded. If this is not done, then the fixed assets available can negatively impact cash flow of a business in the long run. This ratio is significant in measuring business efficiency in using fixed asset to generate revenue. In the case of Memphis, the fixed asset turnover ratio is 3.22% this means that most of its fixed assets need to be upgraded. If this is not done, then it will negatively impact the operation of the business.

h)      Days in patient accounts receivable

=total credit sales/average accounts receivable

=total credit sales=100,237+5,998

                          =106,235

=Average accounts receivable=106,235+79,069+5950/2

                                            =95,627

=106,235/95,627

=1.11 days

It shows the number of days in an average form necessary to collect cash for the services or goods offered to customers on credit. A business with high days accounts receivable ratio means that its debtors takes a long time to pay for the services of goods offered to them in credit. In the case of Memphis, its days in patients’ accounts receivable are 1.11 days. This means that its patients who get services on credit do not take a long time to settle existing debts. This is positive to the business as it makes the business secure from running bankrupt.

  1. Conclusion: analysis and forming conclusions about Oakville clinic ration to the industry averages.

 

Oak clinic ratio

Industry ratio

Profitability ratios

 

 

profit margin

3.67%

10%

return on assets ratio

1.82%

8%

return on equity ratio

6.72%

9%

Liquidity

 

 

days cash ratio

53.31days

$65/day

Utilization of assets

 

 

fixed asset turnover ratio

3.22%

87%

days in patient account ratio

1.11 days

75 days

Solvency

 

 

current ratio

6.71

2.25    

Capital structure

 

 

debt/equity

34%

40%

 

Profitability ratio is a ratio that is used to determine whether a business is making a profit or not. It consists of profit margin ratio, return on asset ratio, and return on equity ratio. Profit margin ratio measures how profitable sales are through out a year. It acts as an indicator for measuring how efficient an operation is in terms of business ability to withstand falling prices, increasing costs and decrease in sales. The industry profit margin is 10% while that of Oakville clinic is3.67%. In most cases, the higher the profitability ratio the more efficient is the business. The profitability ratio of Oakville clinic is less than the industry ratio; this means that it is less than the expectations or demands of the industry. Therefore, it is necessary to put Oakville clinic under investigation to determine the reason for the low profit margin ratio.

Return on asset ratio is used to measure how efficiently a company utilizes its investment assets. It also shows how much a company can generate sales from disposal of it assets. The Oakville clinic return on asset ratio is 1.82% while the industry ratio is 8%. Oakville clinic’s ratio is far much less than the industry ratio this means that Oakville clinic is inefficient in utilizing its investment assets. This is because; according to the industries expectation the most efficient company in utilizing its investment assets should have a ratio of 8%.

Return on equity ratio shows whether or not a business enterprise is making enough profits as compared with its resources, which the shareholders have invested. A high return on equity ratio shows that the business is performing well. Oakville return on equity ratio is 6.72% while the industry’s ratio is 9%. The gap is not very big except that it is slightly less than that of the industry. Therefore, management must come up with the necessary strategies that can enable them to achieve the expectation in the industry.

Liquidity ratio comes from the Balance Sheet and measures a company’s liquidity as on a certain day for instance the day when the Balance Sheet was prepared. This ratio measures a company’s ability to meet its long term and short term obligations. Among the liquidity ratios is the day’s cash ratio. This ratio shows the number of days a business can use the cash in hand to pay its employees for the services offered. It gives a benchmark for all business sizes because it is a ratio that involves cash and expenses. There has been no set standard ratio amount; however, businesses with a ratio of less than 10 days are considered risky. This is because; it can lead to delay in customer payment thus leading to interruption of business operation. In addition, if necessary percussions in such a case are not taken, then the business can easily run at a negative position. The industry’s ratio is 65 days as that of Oakville clinic is 53.31 days. There is no much variation and is worth concluding that the clinic can be able to pay its employees in time.

Utilization of assets involves ratios that try to measure how much a company is growing as compared with its assets. Some of these asset utilization ratios at Oakville clinic include fixed asset turnover ratio and days in patient account ratio. Fixed asset turnover ratio is useful in determining whether the level of growth by a company is assets based. If the fixed asset, turnover ratio is low, then it means that the company’s fixed assets are becoming obsolete hence the need to be upgraded. If upgrading is not done, then the fixed assets available can negatively impact cash flow of a business in the long run. The fixed asset turnover ratio at Oakville clinic is 3.22% while the industry’s ratio is 87%. This means that most of Oakville’s clinic fixed assets need to be upgraded. If this is not done, then it will negatively impact the operation of the business.

Days in patient account ratio show the average number of days to collect cash for the services or goods offered to customers on credit. A business with high days in patient ratio means that its debtor’s takes a long time to pay for the services of goods offered to them in credit. At Oakville clinic, the ratio is 1.11 days while that of the industry is 75 days. This means that its patients who get services on credit do not take a long time to settle existing debts. This is positive to the business as it makes the business secure from running bankrupt.

Solvency ratio measures the exact level of how much solvent a business is operating. These include current ratio that is used to reflect a company’s working capital situation. In addition, it shows a company’s ability to pay short term creditors as a result of realization of a company’s current assets only. In this case, to pay short term creditors does not require a company to realize its fixed assets. Current asset ratio should be greater than one and the bigger the ratio the better. Oakville clinic current ratio is 6.71 as the industry’s current ratio is 2.25 this shows that Oakville clinic has enough current assets required to pay for its current liabilities. This is very positive as it has outstanding, current ratio that is above that of the industry.

Debt to equity ratio shows the level of equity and debts that are used to finance a company’s assets. It gives the relationship that exists between capital contributed by the shareholders and that contributed by creditors. If this ratio is high, then it means that the company has aggressively financed its operations from debt. In this case, due to the interest that will be paid for the debts, there will be a significant negative impact on the businesses earnings. This ratio also gives an indication of the extent with which the shareholders equity can be able to fulfill a company’s obligation especially to creditors in situations where they have been liquidated. In case the ratio is greater than 1, then it means that a lot of the company’s assets have been financed through debts. If the ratio is less than 1, then it means that the company’s assets have been financed through equity. Oakville clinic’s debt to equity ratio is 34% while that of the industry is 40%this means that it has financed it assets through equity. As a result, the business will not suffer a lot of costs in spending its money in for of interest to repay its debts.

  1. Break even analysis:
    1. Calculating the breakeven point in
  2. Units-patient visits

Break even point in units (BEPU) = Total fixed costs (TFC)

                                                      Contribution margin (CM)

Contribution margin (CM) =selling price per unit (SPU)-variable cost per unit (VCU)

                                          =550-350

                                          =200

Total fixed costs (TFC) =180,000

Break even point in units (BEPU) =180,000

                                                            200

                                               =900patients per visit

  1. Dollars-Net patient revenue

Break even point in dollars (BEPD) =Total fixed costs (TFC)

                                                      Contribution margin ratio (CMR)

Contribution margin ratio (CMR) = contribution margin (CM) *100

                                                     Anticipated volume

                                               =200

                                                  1200

                                               =16.67%

Break even point in dollars (BEPD) = 180,000

                                                           16.67%

                                                        = $10,798 per patient

  1. Calculating projected profit or loss based on anticipated volume.

Anticipated profit = anticipated volume * price per unit

                            =1200 * 550

                           = $660,000

A company is said to have broken even if its total sales or total revenues is equal to its total expenditure. At breakeven point, no profit is made, and at the same time, no losses are incurred. This is the lower limit of profit when determining the margin of profitability. At Oakville clinic, the break even point is reasonable, and as a result, the manager should ensure that its employees work towards ensuring break even. In addition, the anticipated profit or loss is high; therefore, necessary measures should be put in place to ensure that it comes out as profit and not loss.

Part C

Feasibility analysis:

  1. Whether the overall analysis results are positive or negative

A feasibility study has a main goal of accessing how much a proposed business is economically viable. This aims at determining on whether a proposed business venture is making economical sense. This is aimed at identifying the possible or existing opportunities to the business. In addition, barriers to the success of the business are also identified. After conducting a feasibility study, on will then decide on whether to continue the proposed business venture or whether to consider another option. This means that if the results are positive, then entrepreneurs can continue with the business, on the other hand, if the results are negative alternative options are considered. Every feasibility study should examine areas such market issues, overview of finances, and organizational and technical requirements. At oak Ville open MRI clinic, feasibility studies or analysis is based on the results from the pro forma income statement, statement of cash flow, ratio analysis, and calculation of break even points.

Looking at the pro forma statement, the net income is 23, 659 this is on an upward trend hence positive to the business proposed. The statement of cash flow, on the other hand, cash at the end has declined by leading to a cash amount of 400,438. The decline has not been very huge to raise a lot of concern because this is normal to every other business. Looking at the ratios, it is worth nothing that the trend is positive for instance, for the profitability ratios they are within the requirements of a service providing industry. Finally, the break even points in terms of units and also in dollars are on a reasonable level. Therefore, the open Oakville MRI clinic should be carried out because from the feasibility analysis there is an upward trend. Some of the successes that have resulted are due to the good management and availability of the necessary services to be offered to customers. The failures, on the other hand, have been due to the fact that the business is still new to the customers hence might be skeptical to get the services.

  1. A recommendation to proceed with or halt the proposed venture.

In my option, based on the results from the feasibility studies, I do recommend that the proposed venture be undertaken.

  1. At least six indicators that factored in to my recommendation.

On coming up with the recommendation that the proposed venture be undertaken some of the issues I identified that makes it necessary for the venture to be undertaken include:

        i.            Since it will be the only open MRI clinic, it will be able to get a lot of customers or clients.

      ii.            Increased number of clients will lead to high or increased level of profit.

    iii.            Its ability to offer high quality services such as those related with neurology and radiology will enable it to have a competitive advantage.

    iv.            Its ability to employ qualified staff will attract more clients because of the assurance of quality services.

      v.            The increase of the ageing population and living in Oakville County means an increase in clients in need of medical services.

    vi.            Ability of the business to meet the demands of the population will attract an increased level of the population to acquire the necessary services.

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