Question

Women's Medical Center (WMC) divides its business into two departments including pediatrics (PD) and gynecology (GY). WMC has $90,000 of raise money that will be used to increase employee salaries. The Center has identified the following cost drivers that could be used to allocate the raise money to the two departments.

PD GY Physicians' salaries $400,000 $500,000 Number of patients 600 400 Nurses' salaries $120,000 $110,000
Based on this information the supervisor of the gynecology department would be expected to advocate the use of which of the following allocation bases?
Option 1: Physicians' salaries
Option 2: Number of patients
Option 3: Nurses' salaries
Option 4: Both Option 1 and Option 2

Answer 1

The gynecology department supervisor would likely advocate for using physicians' salaries as the allocation base for the raise money, as it would result in a higher proportion of funds going to their department.

Step-by-step explanation:

When Women's Medical Center (WMC) is considering how to allocate the $90,000 of raise money to its two departments, pediatrics (PD) and gynecology (GY), we need to evaluate which cost driver would be most favorable for the gynecology department's supervisor for advocating salary increases. The supervisor would likely favor an allocation base that would give their department a higher proportion of the raise money.

Looking at the numbers provided:

• Physicians' salaries for PD are $400,000 versus $500,000 for GY.
• Number of patients is 600 for PD and 400 for GY.
• Nurses' salaries are $120,000 for PD and $110,000 for GY.

The gynecology department has higher physicians' salaries and lower patient numbers compared to the pediatrics department. Allocation based on physicians' salaries (Option 1) would benefit GY more because they have higher salaries, thus would receive a larger share of the raise money. However, using the number of patients (Option 2) as an allocation base would be less favorable for GY since they serve fewer patients. Nurses' salaries are comparable in both departments, making them a less advantageous choice. Therefore, the supervisor of the gynecology department would be expected to advocate for using physicians' salaries as the allocation base for the raise money.