Fargo Memorial Hospital has annual net patient service revenues of $14,400,000.
ID: 2704349 • Letter: F
Question
Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patient is self-payers. The hospitals patient accounts manager estimates that 10% of the hospitals paying patients (its self payers) pay on Day 30, 60, percent pay on Day 60 (Payer A), and 30% pay on Day 90 (payer B). (Five percent of total billings end up as bad debt losses, but that is not relevant for this problem). A. What is Fargo s average collection period ? (Assume 360 days per year throughout this problem). B. What is the firms current receivables balance? C. What would be the firms new receivables balance if a newly proposed electronic claims system resulted in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days? D. Suppose the firms annual cost of carrying receivables was 10%. If the element claims system costs $30,000 a year to lease and operate, should it be adopted (Assume that the entire receivables balance has to be financed.
Explanation / Answer
A) Average collection period= (10% * 30 + 60% * 60 + 30% *90)
= ( 3 + 36 +27) = 66 Days
B) Current recievable balance= 66/360 * 14,400,000 = 2,640,000
C) New average period=(10% * 30 + 60%* 45 + 30* 75)= 3 +27+22.5 = 52.5 days
Current recievable balance= 52.5/360 * 14,400,000 = 2,100,000
D) cost of carrying when 10%= 10/100 * 2100000= 210,000
If the element claims system costs $30,000 a year
Then 30,000 should be adopted as it is less
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