WESTMOUNT RETIREMENT RESIDENCE

COSTING ANALYSIS AND PRICING SCHEDULE

A SUBMSSION

BY

ROHAN B19099
SARJAN B19104
SHOUNAK B19108
VISHAKA B19118
EXECUTIVE SUMMARY

This particular case relates to the Westmount Retirement Residence located in London,
Ontario Canada. The company was experiencing low profitability despite a history of high
occupancy rates and stable clientele. Their main target group was above the age of 75 which
was segmented by people who needed assistance and those who were relatively independent
and capable in performing day to day tasks

Established in 1997 the home had a capacity of 125 units offering both assisted and
supportive living options to seniors. The units were divided into studio suites, one Bedroom
Suites and two Bedroom suites which had areas of 400 ,500 and 600 sq ft respectively. The
current structure of costing assigned common overheads basis the flat area the resident was
occupying.

A more comprehensive analysis of the case is attempted below to arrive a costing which
would help identify better the price to be charged to each patient and increase profitability.

PROBLEM STATEMENT

We have to arrive at a system of costing for Westmount Retirement home so as to estimate a

fair price to charge patients so as to increase profitability of the company overall. Current
Cost system has six departments sharing all the costs:

1. Food Service

2. Support Services

3. Laundry

4. Recreation

5. Facility

6. Housekeeping

Additional overheads like Insurance, Property Tax, General and Administrative Expenses,
Management Fees and fixed operating expenses were allocated equally among the
departments.

Total cost arrived after allocating the costs above was divided among the number of residents
and the figure multiplied by 5 to 8 percent to adjust for inflation. The figure so achieved was
the base price for a studio apartment, additional premiums of 25 % and 50 % were added to
arrive at the costs for one bedroom and two-bedroom suites respectively. This was regardless
of the services used by the patients occupying said residences. These services included but
not limited to Nursing and Dietician consulting.
ALTERNATIVES

We first Examine the total costs incurred by the company:

Wages and
Department Sq Ft #Emp Benefits Supplies Others Total
Food Service 6100 3 2,57,671 $ 2,52,497 $ 5,10,168 $
Supportive Services 10200 17 5,38,392 $ 10,181 $ 5,48,573 $
Laundry 4500 2 77,972 $ 6,109 $ 8,145 $ 92,226 $
Recreation 35400 2 32,303 $ 10,181 $ 42,484 $
Facility 56500 2 37,872 $ 8,195 $ 1,60,116 $ 2,06,183 $
Housekeeping 3200 3 1,07,053 $ 8,145 $ 1,15,198 $
Subtotal 115900 29 10,51,263 $ 2,95,308 $ 1,68,261 $ 15,14,832 $

General and Admin 3500 2 1,49,283 $ 11,032 $ 2,80,574 $ 4,40,889 $

Fixed Operating Expenses 2,41,585 $ 2,41,585 $
Management Fees 2,17,804 $ 2,17,804 $
Reserve Asset Placement 50,889 $ 50,889 $
Total 119400 31 14,18,350 $ 3,57,229 $ 6,90,420 $ 24,65,999 $

EVALUATION OF METHOD

The new costing method takes into account the new the additional effort in fulfilling smaller
orders with larger number of components. This is especially demonstrated by the statement
mentioned in the case:

“For example, processing an order of 50 custom motors with a design requiring 10 special
components per unit generated the same amount of work as processing an order of 1 custom
motor also requiring 10 special components”

“74% of the orders accepted for production by EMW after the change in strategy was for less
than five motors”

Although not mentioned we can assume that in 1987 after implementation of this new system
EMW was able to evaluate profitable orders and thereby pick up the right orders from the
DM1 Billion of orders (DM450 Million)

PROBABLE SOLUTION AND RECOMMENDATION

We would agree with the new method of costing over the previous mentioned method
for orders going forward.
A recommendation to sharpen the current costing method might also to allocate the
production related overheads taking into account both Labor and Machine Hours. We could
either separate the pools (Production Labor Overhead and Production Machine Overhead)
or have a weighted average of the two to allocate the overheads more efficiently. This is only
as each custom motor may have many specialized parts and taking only one of the factors for
overhead allocation might not be most accurate. This is subject to feasibility and magnitude
of both inputs (labor +machine) in a single motor (For example a hand assembled motor
might not have significant machine hours at all)

SOME OTHER KEY NUMBERS

 In 1987, 65625 orders were accepted – 90% custom and 10% standard

 Under new system DM6.3 Million was moved from Engineering Costs and DM27
Million was moved from administrative costs with it being redistributed as DM 13.8
Million to order Processing and DM 19.5 Million to special components case