Vmd Medical Imaging Center

Concord Consulting

Executive Summary

February 05 2018

Submitted by

Amit Chaphekar

Ramchandu Pindiproli

Abhinav Kumar

Julia Ferrato

Darshan Basavaraj

Gursharan Singh Sidhu

Sania Budhraja

Mena Ayad

Synopsis

VMD Medical Imaging Center (VMD MIC) is a local independent medical imaging center. Despite a profit in 2015, senior managers are concerned with future profitability. To maintain their margins, they will have to increase prices leading to a decline in sales. Previous attempts to increase efficiencies to reduce overhead costs were not effective. The senior management accountant and a consultant have both credited the increase in cost to the current overhead cost allocation. They propose a shift to activity-based costing to accurately reflect the consumption of resources per test. The senior management must evaluate which costing system is in line with their offering and common strategic goal.   

Symptoms

• Low morale of senior management due to projected decline in profits
• Rising prices of VMD MIC offering has negatively impacted market share
• Margins can no longer be maintained with current overhead burden rate
• Lack of clarity on cost allocation inhibits management team to align

Problem Statement: Find a costing system that is supported by top management and that would enable profitable growth in line with their common strategic goal.

Quantitative:

• Full costing method using single cost driver ignores differences in resource usage of equipment for each test (Exhibit 1)
• The model proposed by Crest allocates more resource cost to tests that require more specialized maintenance and upkeep (Exhibit 2)
• Posh’s proposed cost system validates the resource requirements for high versus low-tech equipment as being varied enough to require differentiation (Exhibit 3)
• By comparing the three costing systems it is evident that original costing system has MRI subsidized by Radiographs & Fluoroscopies (Exhibit 4)
• The appropriate allocation of resources based on activity-based costing allows tests most requested to reduce costs and return to competitive pricing policy (Exhibit 4)

Qualitative

• Radiographs & Fluoroscopies are “cash cow” products and are competitively priced in market
• Increasing use of heavy-tech equipment has diminished direct labor costs while spending has increased in specialized maintenance directly increasing overhead cost
• 3D MRI acquisition is sunk cost and cannot be viewed as part of cost analysis
• More accurate costing system, as proposed by Crest & Posh, takes advantage of the lean and efficient operations maintained by Director of Operations & technicians
• Adoption and understanding of a change in cost system among top management is crucial to ensure realignment towards common strategic goal

Recommendation

• Improve costing system based on Ms. Posh’s recommendation allowing each test to be more accurately costed based on resource consumption and therefore priced accordingly.
• As such prices can return to competitive range allowing for VMD MIC to maintain market share and margins for profitability

Appendix

Exhibit 1: Full Costing System Breakdown (based on VMD MIC 2015 Financials)

[pic 1]

Exhibit 2: Two Part Overhead Allocation Breakdown as Proposed by Senior Management Accountant Mr. James Crest

[pic 2]

Exhibit 3: Three Part Overhead Breakdown as Proposed by Melanie Posh, an external Management Consultant specializing in Healthcare Orgnizations