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 $12,000. If Dr. Rahavy accepts this offer, he will no longer need the bookkeeper. The bookkeeper's wages and fringe benefits amount to $15 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 $30 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

In the given question we need to compute the cost of currently option of continuing the part time book-keeper. In this option we also need to consider following as current costs:

1. Costs that can be discontinued if outsourcing option is exercised i.e. Storage facility cost
2. Opportunity cost of seeing the additional patients in the saved time due to outsourcing

Cost benefit analysis
Particulars	Amount / Hours
Direct book-keeper cost
Total hours worked by book-keeper	500
[50 weeks* 10 hours per week]
Total wages cost [500 hours *$15 per hours] - [A]	$   7,500
Other costs
Storage facility cost [$100 per month*12 months) - [B]	$   1,200
Opportunity cost of seeing additional patients - [C]	$   9,000
[2 hours*3 patients per hour*$30 per visit fees*50 weeks)
Total cost if continue with part-time book keeper (A+B+C)	$   17,700
Total cost of outsourcing the book keeping	$   12,000
Net advantage / (disadvantage) on outsourcing the book-keeping	$      5,700

Conclusion: Based on above analysis we can conclude that there is net advantage of $5,700 if bookkeeping is outsourced to North Falls Physician's Service Center.

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