Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patient is self-payers. The hospitals patient accounts manager estimates that 10% of the hospitals paying patients (its self payers) pay on Day 30, 60, percent pay on Day 60 (Payer A), and 30% pay on Day 90 (payer B). (Five percent of total billings end up as bad debt losses, but that is not relevant for this problem).
A. What is Fargo s average collection period ? (Assume 360 days per year throughout this problem).
B. What is the firms current receivables balance?
C. What would be the firms new receivables balance if a newly proposed electronic claims system resulted in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days?
D. Suppose the firms annual cost of carrying receivables was 10%. If the element claims system costs $30,000 a year to lease and operate, should it be adopted (Assume that the entire receivables balance has to be financed.