Question

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 $9,000. If Dr. Rahavy accepts this offer, he will no longer need the bookkeeper. The bookkeeper's wages and fringe benefits amount to $12 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 three patients per hour at an average fee of $20 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.

Answer 1

	Keep bookkeeping	Outsource bookkeeping	Financial advantage / (disadvantage)
Annual fees	0	9000	-9000
Bookkeeper's wages and fringe benefits	6000	0	6000
(10 hours x 50 weeks x $12)
Records storage facility rent ($100 x 12)	1200	0	1200
Additional revenues	0	-6000	6000
(2 hours x 3 patients x 50 weeks x $20)			0
Total relevant costs $	7200	3000	4200

It is profitable to outsource the bookkeeping since there would be a net financial advantage of $4200 annually by outsourcing.