Justification of Vendor ROI for a Major Equipment Used in Radiology - Assignment Example

VARIANCE REPORT INTRODUCTION This report discusses the Linear Particle Accelerator which is also referred to as “Linac.” It is used frequently in the radiology department of hospitals around the world. It is a mode of treatment for curing Cancer. This report is divided into two parts and the first part of the report highlights the factors that are necessary to be considered about the industry while forming a variance report. It also emphasizes on interpreting the desired results and the results which can actually be achieved from the performance. The second part of the report discusses the details of the vendors that manufacture and sell the equipment. The report also highlights the relationship between cost justification and return on investment in detail from the manager’s point of view providing justification for the feasibility of the capital purchase or investment decision to be made to the Vice president of the company. COMPANIES SUPPLYING LINEAR ACCELERATOR There are many companies which manufacture or supply the Linear Accelerators. Three companies which are renowned for selling Linear Accelerator are (Medical Expo, n.d): Varian Elekta & Accuray These companies have various products with varying power emission of the linear accelerator. SECTION A PART 1 FACTORS TO BE CONSIDERED WHILE WRITING A VARIANCE REPORT Variance report is a method of communicating the performance of the company between the executives. A comparative analysis is conducted by comparing the available set of figures to reach an effective outcome. The sole purpose of the variance analysis is to review the budgetary goals and targets which the company plans to achieve. The management required to review the monthly budget because the expenses of the salaries were higher and the supplies and equipment which were available in the particular department were comparatively lower than the budget breakup. A properly formed variance reports includes the overspending or under-spending trends. In this case the hospital is spending more on the salaries of the employees and less on the equipment although the prescribed budget is sufficient to do so. A variance analysis must include proper graphs and figures and it must define the favorable and unfavorable position of a particular decision (Microsoft, n.d.). A variance analysis must include the comparison of the actual and the budgeted figures. The difference in the variation of the actual and the budgeted figures of the hospital will be clearly predicted to reach to a conclusion. The factors which are of prime importance and must be kept on high priority when making variance report are The actual cost of purchasing the equipment The cost of installing and operating the equipment Power cost and air connection costs which are included in the operating cost Fixtures and tools required to operate the equipment Managing the project Restoration of the site of installation of the equipment A variance report identifies the areas which will improve the installation of the Linear Accelerator. The equipment and the vendor from which the equipment will be purchased are discussed in this report. During the analysis the calculation of the cash budget will be analyzed. A detailed structure of the estimated rise in the number of patients for the economic period will be projected with the figures of the receivables and the cash expenses that would be incurred. With this technique, the report could present better analysis. VARIANCE REPORTS AND ESTIMATION OF THE PROJECT The analysis which the manager can make for this report will revolve around the companies mentioned above which produce the linear accelerator. A comparison of the cost of the product and the Return on Investment (ROI) of the project will help develop an easier and better solution. Variance reports are formed with respect to the available budget which the hospital has available to be spent, then the desired outcome which can be generated from that particular investment. The option which provides the highest forecast of the available solution will be selected by the organization. To calculate the project and its significance with respect to any sort of delay in the project the report estimates the cost intended to be incurred and the cost variation that would arise due to the change in the cost and the time factor. If the installation of the Linear Particle Accelerator was intended to be installed in a 10 days, the variation in the cost is calculated with the increase in the time taken to complete the project. The total budget for the project is estimated to be $500,000. ESTIMATED COST In Thousand $ In Thousand $ In Thousand $ In Thousand $ Initial Equipment Cost 300 300 300 300 Project Estimated Time Per Day Cost 8 Day Cost 10 Day Cost 12 Day Cost Project Manager And Team Cost 2 16 20 24 Labor Cost 1 8 10 12 Opportunity Cost Of The Project 10 80 100 120 Disposal Cost 0 0 0 0 Cost Of Supplies Used 1 8 10 12 Initial Operating And Maintenance Cost 0.5 4 5 6 Total Estimated Cost 314.5 416 445 474 *Opportunity cost estimated at 2% of the entire project per day *Assuming that the equipment has not been installed before so the disposal cost is zero Different costs other than the equipment costs have been presented graphically below: The table and graph above shows the change in the estimated cost of the project with the increase in the time of the whole project. The cost of the project if it is completed in 8 Days is $416,000 at the same time the cost of completion of the project in 10 Days is $445,000 and in 12 Days it will be $474,000. The above is the estimate of the cost presented to the Vice President of the company along with details of the cost which will be incurred. This estimation of the project is very important to be assessed by the manager of the budgeting department. Other cost like transportation etc. has been included in the net cost of the product. Change In The Cost Saved With The Increasing Number Of Days Figures in Thousand If the project is completed in 8 days budget allotted 500 8 day cost 416 Amount saved 84 If the project is completed in 10 days budget allotted 500 10 day cost 445 Amount saved 55 If the project is completed in 12 days budget allotted 500 12 day cost 474 Amount saved 26 PART 2: The relationship between the variance reporting and interpreting the results derived from the variance reporting into the actual scenario makes the budgeting stronger. The budgets are formed to analyze the cost that needs to be incurred. The variance reporting is an estimate of the actual investment and the returns which can be expected to be generated with the coming time. The actual results are always different from the speculated results because variance reports only predict an estimate of the project. The true amount cannot be calculated unless and until the project has not been completed. The management always extracts the estimates from the reports. A perfect variance report is that which has covered all the expenses in advance and projects the actual expenses very closely. The management always considers the projects which depict the actual projection of the expenses. Variance reporting Variance reporting is estimate of the allotted budget set by the organization and the actual spending of the budget Interpreting variance report results To interpret the results of the variance report it is identified that it is seen that whether the company is over-performing, underperforming with the budget which it has been provided. Actual results of performance The actual result of the performance is checked by the performance of the organization on a particular project. If the desired gains are achieved in accordance to the goals of the organization than that performance is called the actual performance of the organization. SECTION B PART 1: REQUEST INFORMATION FROM THE VENDOR There are many companies which produce the Linear Accelerators. Three companies which are renowned for the production of Linear Accelerator are Varian Elekta & Accuray  For ordering the production and installation of the Linear Accelerator the vendors would be contacted. The vendors can be asked to quote a price for the requirement of the tender of the company. The companies will quote a cost justifying the differences in the prices. They will provide proper reasoning for the change and the fluctuation in the prices. This will give the cost justification of the amount the company is charging. In addition to this, the company will justifying the returns that the hospital will achieve and then compare it with the total investment required for installing the Linear Accelerator. Same will be for providing the Return on Investment (ROI). The companies will have to justify the value which will be gained by the hospital after the investment has been made. ROI is calculated from a simple formula of (Gitman, 2003): ROI = (Gain from Investment – Cost for Investment) / Cost of investment The higher the derived ROI of the project the higher will be the returns of the project. Any manager will choose higher returns so that the benefits which they derive from the project are higher and produce more and better results for the investment which has been incurred. PART 2: The hospital requires the capital purchase to be made because it will prove to be a good investment for the hospital. The hospital has a sufficient unutilized budget which it requires to spend on supplies and equipments. Including new equipment will increase the patients who require that facility. The radiology department of the hospital is one of the most expensive departments and requires highly powered equipment for the treatment of the patients. The management has a sole objective of increasing the revenues. Therefore, this equipment would allow the management to increase its returns and expand its range of services offered by the hospital. Therefore this would not only allow the hospital to satisfy its customer in a better way as customers can have the services from radiology department from the same hospital. Justifying the purchasing decision is very important because it is the base of determining that whether the project will be accepted or rejected by the management. A document which comprises of the cost required will also show the ROI to the management. The management always looks for the key factors which become of prime importance when making the decision. A proper cost structure plays an important role in attracting the top management to show interest in the project. COST FOR CAPITAL EQUIPMENT JUSTIFICATION FIXED COST VARIABLE COST Factory overhead Direct material, labor and overhead expenses Equipment justification and requirement Services of the staff required New staff to be hired for operating the machinery Maintenance of the machinery on a regular basis Selecting the available vendors for purchasing the product Direct Expenses Installation Inspection Testing Supervision Disability test of the employees being hired (Assembly Magazine, 2001) The proposals must be aligned to the goals of the organization. The factors which are very important and need to be structure in the proposal are The Purchase price of the equipment The Installation charges of the equipment Power, electric and air connection costs which can also be categorized as the operating cost Tools required to operate the equipment and the fixtures which need to be installed Management of the project of installing the equipment Preparing the site as per the requirement of the equipment The costs which are needed for the removal of the equipment and installation of the new equipment Each organization and the top management have a different set of preference for the cost which is required to be incurred. The cost must be justified in that particular way. Apart from the cost the management is concerned with the reliability of the suppliers. The specification of the equipment must also be suitable for the hospital. The cost of the capital which is being incurred must generate the desired level of results which are expected. The labor cost and the material cost which is required to be incurred must be carefully analyzed and calculated. OPERATING COST AND FACILITIES CONSIDERATION The pre day initial operating cost of the equipment has been calculated at a fixed rate of $500. This is per day cost and it will be required to be incurred to operate the equipment. The facilities consideration for the proper functioning of the machines is providing proper air system to maintain a particular temperature in the room and to maintain a proper temperature for the equipment. It is essential to furnish a proper setup for the equipment and a proper setup is made so that the functionality of the equipment is maximized and that the desired results can be accomplished. The operators of the Linear Accelerator are the primary important factors for the functioning of the linear accelerator. They are the person responsible for operating the machinery. They deal with the challenges and the difficulties, they see to it that the pressure required for the equipment is properly maintained and managed, and these staff members are trained and equipped to deal with the challenges that arise (Computing Cases, n.d.). CONCLUSION The conclusion for this report is that the variance analysis is very necessary to analyze the proper allocation of the budget and getting proper returns. A variance report is the internal channel of communication between the top management and the line managers. It analyzes the efficient usage of the resources and the budget that has been allocated for a particular department. Using the variance analysis the budget available for the department is utilized to the maximum for the perfect allocation of the resources on the employees and the equipment of the organization. Where new equipment is concerned the cost which is incurred, the fixed and the variable costs are analyzed to reach to the nearest estimation of the expenses. The minimum difference between the actual and the estimated expenses shows the accuracy of the estimation and the analysis conducted. REFERENCES Assembly Magazine. (2001). Capital equipment justification. Retrieved June 4, 2013, from http://www.assemblymag.com/articles/83256-capital-equipment-justification Computing Cases. (n.d.). Linear accelerator operators. Retrieved June 4, 2013, from http://www.computingcases.org/case_materials/therac/supporting_docs/therac_case_narr/Operators.html Gitman, L. (2003). Principles of Managerial Finance. Boston: Addison-Wesley Publishing Medical Expo. (n.d.). Linear particle accelerators. Retrieved June 4, 2013, from http://www.medicalexpo.com/medical-manufacturer/linear-particle-accelerator-1670.html Microsoft. (n.d.). What are the factors to consider in creating a variance report in management reporter? Retrieved June 4, 2013, from http://office.microsoft.com/en-us/performancepoint-server/what-are-the-factors-to-consider-in-creating-a-variance-report-in-management-reporter-HA010351468.aspx Read More