Make or Buy Rashad Rahavy, M.D., is a general practitioner whose offices are loc

Question

Make or Buy Rashad Rahavy, M.D., is a general practitioner whose offices are located in the South Falls Professional Building. In the past, Dr. Rahavy has operated his practice with a nurse, a receptionist/secretary, and a part-time bookkeeper. Dr. Rahavy, like many small-town physicians, has billed his patients and their insurance companies from his own office. The part-time bookkeeper, who works 10 hours per week, is employed exclusively for this purpose.

North Falls Physician's Service Center has offered to take over all of Dr. Rahavy's billings and collections for an annual fee of $7,000. If Dr. Rahavy accepts this offer, he will no longer need the bookkeeper. The bookkeeper's wages and fringe benefits amount to $13 per hour, and the bookkeeper works 50 weeks per year. With all the billings and collections done elsewhere, Dr. Rahavy will have two additional hours available per week to see patients. He sees an average of four patients per hour at an average fee of $35 per visit. Dr. Rahavy's practice is expanding, and new patients often have to wait several weeks for an appointment. He has resisted expanding his office hours or working more than 50 weeks per year. Finally, if Dr. Rahavy signs on with the center, he will no longer need to rent a records storage facility for $100 per month.

Conduct a relevant cost analysis to determine if it is profitable to outsource the bookkeeping.

Calculate the net advantage (disadvantage) of outsourcing the bookkeeping. Use a negative sign with your answer to indicate a net disadvantage, if applicable.

Explanation / Answer

Total Saving if Doctor shifts from Book keeper to services of Center on yearly basis:

1. Savings in the Book keeper cost (10 Hrs per weekx 13 Rate per hrs x 50 Weeks) 6,500

2. Additional revenue from patient 14,000

Time saved 2 Hrs per week x Total Week 50 x 4 (No of patient per hours) x 35 (charge per patinet)

3. Saving on record facility (100 per month x 12 months) 1,200

TOTAL SAVINGS 21,700

Total Additional Cost on account for services of center (7,000)

Net Benefit to the Doctor 14,700

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