PLEASE ANSWER IN CLEAR DETAIL AND WITH REASONING. 7.3 Fargo Memorial Hospital ha

Question

PLEASE ANSWER IN CLEAR DETAIL AND WITH REASONING.

7.3 Fargo Memorial Hospital has annual patient service revenues of $14,400,000. It has two major third-party payers, and some of its patients are self-payers. The hospital?s patient accounts manager estimates that 10 percent of the hospital?s paying patients (its self-payers) pay on Day 30, 60 percent pay on Day 6o (Payer A), and 30 percent pay on Day 90 (Payer B). (Five percent of total billings end up as bad-debt losses, but that is not relevant to this problem.) a. What is Fargo?s average collection period? (Assume 360 days per year throughout this problem.) b. What is the firm?s current receivables balance? c. What would be the firm?s 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 6o and 90 days?

Explanation / Answer

a) Average collection period % Days %* days 0.1 30 3 0.6 60 36 0.3 90 27 66 a) Average collection period 66 days b) Firm's current receivables balance (Annual billings/ 360) * Average collection period (calculated as above) ie. (14400000/360)*66 = $ 2640000 c) Average collection period % Days %* days 0.1 30 3 0.6 45 27 0.3 75 22.5 52.5 Average collection period 52.5 days Firm's new receivables balance (Annual billings/ 360) * Average collection period (calculated as above) ie. (14400000/360)*52.5 = $ 2100000

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