Question 1
Your mate Arty the architect is feeling overwhelmed by the idea of designing the rotating the floor in the medical centres, and questions if it is worthwhile in the long-run spending all the time designing and building
Required
a) Explain to Arty what is meant by a learning curve and explain the learning curves role in cost estimation.
b) How does a learning curve differ from an experience curve?
c) What is an 80% cost experience curve?
Question 2
Once the medical centre is up and running the company is looking into setting up a shared services centre which will be responsible for accounts payable and receivable. To also help control costs the centres pharmacy will supply all the medical supplies that the doctors need. The pharmacy will be open 24 hours a day. A pharmacy employee will restock medical supplies every night at a cost of $40.00 per room for 6 months and then the price will increase to $42.50 for the next 2 years. The medical centre manager has however received a costing from an outside pharmacy (Dealers Direct) that will perform the same role at a cost of $27.50. The variable cost per room is $ 23.00. The medical centre pharmacy has capacity to supply the room's needs The medical centre manager wants to use Dealers Direct to provide all the medical supplies and is looking to you to help prepare an analysis to support his change of pharmacy.
Required
a) Explain how transfer pricing is relevant in a shared services environment. In your answer explain the meaning of shared services and outline their advantages and disadvantages.
b) What would be a suitable price for the medical centre to accept from the pharmacy, explain your answer?
c) Would the transfer price alter if the medical centre has no spare capacity? Explain your answer
d) Describe the potential conflict between the medical centre management and the company as a whole when it comes to deciding transfer pricing situations. In your response include a discussion of why it is not desirable for the Board of directors to get involved.