Indian Institute of Management
Nagpur
A Case Analysis Report on
VMD Medical Imaging Center
Guided By
Prof. Swamy Perumandla
Submitted in partial fulfilment of the requirement for the evaluation of the
course of
Management Accounting
By
(Group 1)
Manvi Roy - P24153
Siddhesh Pande - P24155
Sidhartha Sankar Dash – P24156
Dushyant Pratap Singh Kushwah – P24188
Bhadane Pratik Deepak – P24191
Bhawana Singnapure – P24196
VMD Medical Imaging Center (VMD MIC)
1. Case Overview
Even though VMD MIC reported profits in 2015, it is currently facing strategic and operational
challenges. With rising overheads, the increase in competition as well as price problems threaten its
sustainability. Key issues include:
• Demand Concerns: Sales VP Christine Widemeier is worried about customer retention due to
price increases.
• Cost Allocation Debate: Operations Director Mike Jankoski believes cost allocations are unfairly
inflating expenses.
• New 3D MRI Investment: CFO Laura Gleason questions the profitability of the underutilized
machine.
• Costing System Limitations: The existing cost allocation method using a single burden rate
(144.12%) fails to accurately reflect the cost structure of different tests.
• Alternative Costing Proposals:
o Senior Accountant James Crest suggests splitting overhead into Direct Labor Related
Overhead and Equipment Related Overhead.
o Consultant Melanie Posh recommends further dividing equipment costs into High-Tech
and Low-Tech Equipment Overhead.
The management team must decide on a revised costing system to improve pricing, cost control, and
long-term profitability.
2. Cost Analysis and Calculations
2.1 Current Cost Allocation
• Total Overhead: $1,982,428
• Direct Labor: $1,375,571
• Burden Rate: (1,982,428/1,375,571)×100=144.12%
This means that for every dollar of direct labor, an additional $1.44 of overhead is allocated.
Test Direct Labor ($) Overhead Cost ($) Total Cost ($)
X-ray 417073 601072 1018145
Fluoroscopy 414047 596711 1010758
Test Direct Labor ($) Overhead Cost ($) Total Cost ($)
CAT Scan 270850 390340 661190
MRI 273601 394305 667906
2.2 Alternative Cost Allocation - Crest’s Proposal
• Direct Labor Related Overhead: $721,392
• Equipment Related Overhead: $1,261,036
• Allocation Basis for Equipment Overhead: Machine run time
Equipment Overhead Rate per Hour= (1,261,036/6,28)=200.77 per hour
Test Direct Labor ($) Run Time (Hours) Equipment Overhead ($) Total Cost ($)
X-ray 417,073 1,060 212,816 629,889
Fluoroscopy 414,047 1,312 263,558 677,605
CAT Scan 270,850 1,394 279,764 550,614
MRI 273,601 2,515 504,898 778,499
2.3 Alternative Cost Allocation - Posh’s Proposal
Further breakdown of equipment overhead into High-Tech and Low-Tech costs:
High-Tech Equipment Overhead Rate= (921,793/4,181)=220.46 per hour
Low-Tech Equipment Overhead Rate= (339,243/2,100)=161.54 per hour
Direct Labor High-Tech Low-Tech Equipment Overhead Total Cost
Test
($) (Hours) (Hours) ($) ($)
X-ray 417,073 268 792 199,469 616,542
Fluoroscopy 414,047 579 733 242,172 656,219
CAT Scan 270,850 819 575 259,328 530,178
MRI 273,601 2,515 0 554,457 828,058
3. Managerial Decision Recommendations
3.1 Optimal Costing Method
• The current costing system inflates the cost of simple tests (X-ray, Fluoroscopy) and undervalues
advanced procedures.
• Posh’s model provides the most accurate cost allocation as it differentiates between high-tech
and low-tech equipment.
3.2 Pricing Strategy Adjustments
• X-ray and Fluoroscopy prices should be lowered to remain competitive, aligning with the market
rate.
• MRI pricing should be reviewed and potentially increased to reflect actual costs.
• Implement tiered pricing based on service complexity.
3.3 Operational Efficiency Measures
• Enhance demand for the 3D MRI machine with the oncology community.
• Fine-tune scheduling and maximize equipment utilization to reduce cost per unit.
3.4 Long-Term Strategy
• Negotiate cheaply for high-tech equipment maintenance costs.
• Educate physicians about the importance of 3D MRI scans.
• Evaluate outsourcing or partnerships to buffer high-tech equipment expenses.
4. Conclusion
VMD MIC has to develop a more refined cost allocation model for growth of theirs while still being fairly
priced and making sustainable profits. Posh's system probably best describes the costs under high-tech-
low-tech costing systems. Pricing the three and finally optimizing operations will help VMD-MIC maintain
position and health.
