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Bellaire Clinical Labs, INC. (A) Case Solution

Solution Id Length Case Author Case Publisher
533 1319 Words (4 Pages) Luann J. Lynch, Robert J. Sack Darden School of Business : UV4034
This solution includes: A Word File A Word File and An Excel File An Excel File

Operating in the clinical laboratory testing industry, Bellaire Clinical Labs, INC. is a service firm which aims at providing high quality medical and laboratory testing services to local physicians, as well as, to hospitals. This privately owned, small and independent laboratory ensures the simultaneous provision of routine testing such as blood tests and speciality testing. However, due to the increased competition within the Boston area due to the increased number of independent local and national laboratories, the firm’s margins were forced to shrink. Therefore, Bellaire Clinical had to resort its marketing campaigns to the extent that its success in future became dependent on the newly devised a strategy of media campaign. However, considering the volume of services provided by the laboratory, the increased competition, the change in the prices of the three kinds of customers and the effect on the operating costs of the laboratory; it was required from the Joe Mack by chief financial officer by Wilma Lands; to devise a detailed operating plan for the year 2003.

Following questions are answered in this case study solution:

  1. Prepare a budgeted income statement for 2003 based on the information. You may want to re-list your assumptions. What additional assumptions did you have to make, if any?

  2. What issues would you bring up with Wilma Lands? Why?

  3. Was Marty Walters’s material cost per test of $2.70 in 2003 reasonable? How could such a cost reduction be achieved?

  4. What benchmarks should Bellaire use to gauge the reasonableness of the budget? Name some companies that Bellaire might want to compete with.

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Bellaire Clinical Labs INC A Case Analysis

1. Prepare a budgeted income statement for 2003 based on this information. You may want to re-list your assumptions. What additional assumptions you have to make if any?

Based on the information provided in the case and considering that the Bellaire Clinical Labs, INC. is a service laboratory; the budgeted income statement for the year 2003 is formulated under certain underlying assumptions:

  1. Percentage test routine decreases by $ 23200 of the routine tests in 2002.

  2. Percentage test speciality increased by $ 43200 of the speciality test in 2002.

  3. Percentage tests paid for by physician decreases to 50% in 2003.

  4. Percentage test paid for by other parties increased up to 30% in 2003.

  5. Price of routine test when physician pays decreased by $ 0.5.

  6. Price speciality test when the other party pays increased by $ 0.25.

  7. Material costs for 2003 is $ 2.7 per unit.

  8. Labour cost for routine test is $ 3.25 per hour.

  9. Labour cost for speciality test is $ 19.5 per hour.

  10. Maintenance costs are assumed to be divided into two components:

    • Fixed costs are assumed to be $ 300,000.

    • Remainder varies with the number of test performed i.e. the variable costs is calculated as the $ 1.106 multiplied by the total volume of the test.

  11. Total billing and collection expense were kept constant at the cost level in 2002:

    • $ 0.50 per test for test billed to physician.

    • $ 3.50 per test for test billed to individual patients.

    • $ 3.00 per test for test billed to other parties.

  12. Annual advertising and promotion expense are estimated to be $ 820,000.

  13. Management salaries and bonuses expected to be $ 700,000.

  14. Other administrative costs were assumed to be fixed at $ 500,000.

However, while calculating the total labour cost for the laboratory per hour rate of labour is mentioned in the case. But the budgeted income statement is based on a yearly basis; therefore, by using per hour labour costs the total labour costs for the year is calculated by making the following assumption:  that the labour employed by the Bellaire laboratory work 8 hours a day and 5 days a week throughout the year. The budgeted income statement is formulated in the exhibits.

2. What issues would you bring up with Wilma Lands? Why?

The company’s chief executive officer, Wilma Lands is detailed oriented and demanding person. To counter the increased competition in the medical testing industry which had a negative impact on the profit margin of the laboratory not only the media campaign was initiated by the CEO but the operating budget for the year 2003 was given considerable importance. Therefore, issues which should be brought under discussion with Wilma were the projected percentage of the increased revenue based on the extent to which the company will be successful. Therefore, there would be a need to do scenario and sensitivity analysis which is needed to be discussed with her. Furthermore, there is a serious concern of the renewal of the agreements with the physicians which should be discussed and resolved in order to make certain the operating plan of the company. One of the issues which needed a proper plan to be implemented is the reduced material cost of $2.7. Therefore, by discussing the matter with CEO new ways can be developed to materialize the cost savings. Moreover, though the CEO has kept the advertising and promotion expense to vary with the revenue, but the marketing director exhibited a fixed estimate of $ 820,000; therefore, the difference in the estimations would also be discussed with Wilma Lands.

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