Physical Therapy Budget - Assignment Example

BILLS PHYSICAL THERAPY CENTER Proposed Total Expense Budget Fiscal Year 2008 - 2009 Submitted by ------------------------------------ Supervising Budget Officer CASE – PHYSICAL THERAPY BUDGET. The Case: Subsequent to your budget proposal, the CEO of Bill’s Physical Therapy has learned of startling competitive developments affecting the company’s short and long run survival. Two local hospitals are implementing physical therapy departments and are going to attempt to price them as ‘loss leaders’ in the industry, meaning that they may not cover cost. That is, the full cost of physical therapy will be subsidized by profit making services. Though the CEO will vigorously defend in court, she is assuming the worst – that Bill’s Physical Therapy must make drastic budget cuts to stay alive. The CEO has told you that the company must operate on $830,000 in total expenses. Question 1 In a comprehensive 750-1000 word paper, detail specifics on how you will reduce expenses to $830,000 from $1,232,000. Assume that each person laid off will receive 2 weeks’ severance pay (1/25 of annual salary) and further assume that no exposure is created by this. SEVERANCE PAY SHOULD BE INCLUDED IN THE NEW BUDGET. Show the new budget in the same format and explain fully by expense line item how much you cut and why you did so. See http://sbinfocanada.about.com/cs/management/a/howtodownsize.htm Question 2 In a separate document, detail your plan for disseminating the information about the situation to the company and its employees. Include what you have been told to do, why you made the changes and finish with a statement that some people will have to be laid off. Then write a letter to each employee you are terminating and explain the reason why you cut their job. Mention the severance pay. PART I THE SITUATION In City Alpha there are three institutions offering physical therapy treatment to the communitys patients, A Hospital, B Hospital and Bills Physical Therapy . Unlike Bills Physical Therapy Center, a new entrant in the market with 25 workers offering physical therapy treatment, the hospitals are relatively integrated units with other facilities, and physical therapy is only one of the various medical and health services they offer. These hospitals can survive even if one of their departments loses money, whereas a price war in physical therapy sector would do great damage to Bills Physical Therapy Center, threaten its survival, and may force it into bankruptcy. The CEO of Bills Physical Therapy believes that this move to under-price his company is a predatory tactic on the part these hospitals is illegal. Predatory pricing is a practice where one firm attempts to drive out rivals (usually smaller ones) by pricing at such a low level that the rival cannot make money (Czinkota et al, 2000). After the target company has been eased out of the industry and the competition, the remaining ones will seek to significantly increase their prices to the prejudice of the consumers. This is a violation of Federal law. The companys CEO wants to contest it in court, but in a worst case scenario, such an effort may prove futile; hence, the order from the CEO to make drastic cuts on the total expense budget so that the company can survive. A drop of 32.6% from $1,232,000 to $840,00 (a decrease of $402,000) was ordered. An assumption placed in the revised budget project included 2-weeks severance pay (1/25 of annual wages) for each worker laid off and that there would be no negative exposure as a result of this management decision. PROBLEM ANALYSIS & SOLUTION As budget officer with only the expense budget figures to go by, I have to use inductive reasoning to arrive at the budget details. The following assumptions will have to be made. Based on standard ratios prevailing in the industry, about 60 per cent of the total expense is accounted for by labor costs because the industry is labor intensive, and the balance of about 40 per cent will be allotted to administrative overhead and other variable expenses. It is also assumed that each worker, on the average, is paid $12 per hour, which translates to $30,000 per annum salary based on 250 working days. Taking this ratio into account, I computed that 60 per cent of the reduction in the total expense budget is $241,200; dividing 30,000 into this number will yield slightly over 8 workers who may have to be laid off. I include $9,600 as severance pay (1/25 of annual payroll of affected workers). The severance pay is not taken out of the reduced budget because it is an extraordinary expense, not part of the operations. The following adjusted budget will thus emerge: Item Amount % Salaries and wages eliminated (8 workers) 240.000 59.7 Payment of severance package 9,600 2.4 Administrative and other expenses saved 152,400 37.9 --------- ----- Total budget reduction 402,000 100.0 The total reduced expense budget of $830,000 will take care of the salaries and wages of 17 retained workers receiving the same $30,000 average pay, as well as the normal proportion of administrative and other expenses, as follows: Item Amount % Salaries and wages (17 workers x 30,000) 510,000 61.4 Administrative and other expenses 320,000 38.6 ---------- ------- T o t a l 830,000 100.0 [Note that the budget prior to the ordered slash in the projected budget would h ave been the following: Salaries and wages (25 workers x 30,000) 750,000 60.9 Administrative and other expenses 482,000 39.1 ---------- ----- T o t a l 1,232,000 100.0 ] PART II A. PLAN OF ACTION I shall advise the CEO of Bills Physical Therapy Center to meet the Board of Directors in order to finalize the decision to downsize the companys operations and to outline to the Board the course of action to be taken. A memorandum will be sent to the employee association, if any, and to the employees, posted on the bulletin board, about the crisis the company is facing and the difficult decision it has to make. It will emphasize the fact that the existence and viability of the company is at stake, and that without taking drastic action of cutting the budget for the ensuing fiscal period, the company will be forced to file for bankruptcy protection. Inasmuch as the company has certain alternatives, no matter how painful and drastic they may be, it will have to take them, with the hope that when it is able to tide over the present crisis and become viable again, it will give priority to the employees who will have been laid off or terminated because of the downsizing decision. Though the decision will be difficult, it will be explained that a range of objective criteria will be formulated so that there will be no charge of unfairness or discrimination from anyone as to how the decision to terminate certain employees, and not others, was made. The announcement should also assure those who will be negatively affected that the situation was likely to be temporary. However, should they need the companys assistance with regard to securing references or recommendations, it will be very willing to extend help. B. Sample letter: TERMINATING AN EMPLOYEE DUE TO DOWNSIZING August 30, 2008 Mr Jack Bleak 14 Wilson Street Los Angeles, CA Zip Code Dear Mr. Bleak, As we discussed last August 15, 2008, the decision of our competitors to reduce their rates for physical therapy treatment of patients in the Los Angeles area to a level below our cost has meant that our company is currently and will continue to be operating at a loss, and this caused us to eliminate several positions at Bills Physical Therapy Center. Unfortunately, much to our regret, we were forced to eliminate your position. You will receive your regular pay until the termination of your employment on September 30, 2008. Your company medical insurance plan will also be terminated at that time and severance pay will be equivalent to 2-weeks pay, or the amount of $1,200. I will be happy to provide you with a letter of reference if you so request. Sincerely, WILLIAM H. MORRISON CEO BILLS PHYSICAL THERAPY CENTER BIBLIOGRAPHY Baumol, W.J. & Blinder A.S. (1994). Economics: Principle and policy (6th ed.), The Dryden Press, Orlando, FL. Baye, M.R. (1997). Managerial economics and business strategy (2nd ed.). Englewood Cliffs, NJ: Irwin/McGraw Hill. Czinkota et al. (2000). Marketing: Best practices. Orlando, FL: The Dryden Press Dauber, N.A., Siegel, J.G., & Shim, J.K. (1996). The vest-pocket CPA (2nd ed.). New York: Prentice Hall Jackson, S. & Sawyers, R. (2001). Managerial accounting: A focus on decision making. Orlando, FL: Harcourt, Inc. Marshall, D.H., McManus, W.W., & Viele, D.F. (2002). Accounting: What the numbers mean (5th ed.). New York: McGraw Hill Irwin . Schoell, William F., and Joseph P. Guiltinan. (1992). Marketing: Contemporary concepts and practices,(5th ed. ). New York: Allyn and Bacon Ward, Susan. How to downsize your business. Retrieved August 19, 2008, from http://sbinfocanada.about.com/cs/management/a/howtodownsize.htm Read More