West-mount Retirement Residence Case Solution
Costing system is very essential for the companies’ profitability. West-mount costing system was creating issues for it, as the company’s profitability was decreasing due to which the administrator was concerned about solving the low profitability issue. This case discusses the costing-related issues, exploring the other possible costing systems that can change the scenario and increase the company’s profitability. The administrators were not sure about how much each service was costing to the firm. Previously, the patients were asking for the same services so West-mount set the same price for all the residents. This case analysis will suggest a pricing model that will solve the issues being faced by the company. The analysis is based on the data available in the case Invalid source specified..
In May 2006, West-mount was facing a drop in its profitability and the competitors’ profitability was increasing at a significant rate in the industry. According to the company’s analysis; the costing system was considered a limitation to offer suitability to the customers. The current pricing model of West-mount was charging the same amount from all the customers regardless of the type of services customers were opting for.This pricing method was not effective and was affecting the company’s profitability. There was a fixed price to different services being offered to people belonging to different age groups. As already stated, there were two groups; so different services are needed for both the groups.
Few people in the group require basic help and few in the second group need medical care and support services. Demographic changes and medical care requirements have shifted the scenario for West-mount. The profits have been dwindled and it has become difficult for West-mount to come up with a new strategy. Rather than charging the same prices from all the residents; West-mount intended to charge based on activity. This change in the costing system can change profitability being generated by West-mount.
West-mount Retirement Residence was founded in 1997. Initially, it was started as a retirement residence of 125 units with both options for senior community, i.e. supported living and assisted living. The company was offering multiple bed options for the consumers. Along with the services of suites; the residents also had access to the other common areas, i.e. dining room, activity room and other common areas. West-mount’s target residents were over the age of 75 and were divided into two groups: independent residents who needed no assistance in daily activities and the second group consisted of living assistance, who were dependent on daily livings and frailties services.
Competitors and Differentiation
The demand for resident support services was increasing in the industry, because there was high demand for support services. It created open opportunities for many, and competition in the industry had increased. The direct competitors of West-mount were: Chelsey Park Retirement Community, Central Park Lodge, and Long worth Retirement Village. The differentiation for West-mount was its pricing strategy, as West-mount was charging low prices in the industry. The pricing strategy of West-mount was based on room size, bedroom size and studio. West-mount had a huge geographical reach and a huge client base. West-mount had a huge base of loyal clients. It had a brand identity as compared to other organizations within the industry. The clients’ preference was West-mount due to its low pricing strategy which was same for all the residents.
Current costing and pricing system
The current costing system was based on the rooms and suites; the studio, one-bedroom, and two-bedroom were 400 square feet, 500 square feet, and 600 square feet, respectively. The costing was based on six departments, i.e. support services, food services, laundry services, housekeeping and facility. Every department was independent for its benefits, costs, supplies and overhead cost. All the fixed costs were allocated under the fixed cost and operating expense, and fixed overhead cost was equally distributed among the departments. The total monthly fees were determined by dividing the total with the total number of residents, after which the numbers were multiplied with the inflation rate, i.e. 5% or 8%. The number was later adjusted with the size of the suite and that base amount was the cost of the studio. The costs of one bedroom and two bedrooms were determined through the multiplier of 25% and 505, respectively. There was no system in the process to measure the variations in the services.
Reasons for Low Profitability – FY2005
Previously, the services which residents had opted for were quite similar and that did not affect the profitability of the company that much, but last year’s services that were opted by the residents were w quite different.Residents belonging to different age groups opted for different services and the variation in the services reduced profitability for West-mount. Residents belonged to different age groups, with some having the requirement of only basic care services and some opting for medical care and basic services as well,which created a huge difference in the profitability.
Strengths and Weaknesses of Current Model
The departmental accounting culture being followed at the West-mount Retirement Residence seems a fair costing model, as it enables the departments to examine the relevant expenditures incurred by each department of the organization. In other words, the current costing model enables the company to trace the expenses to each department and determine which department is incurring more retirement based expenditures and to take necessary actions to reduce the extra and avoidable cost incurrences.
The current costing model of the company is driven by the industry competition. The competition has enabled the company to keep the prices relatively lower in order to attract more customers to choose West-mount Residence’s retirement services over its competitors. The monthly studio cost at West-mount is approximately 1284.27, which is quite less than the monthly rates charged by other competitors in the industry. Though the company has not achieved profitability, but the costing model helps the company in staying competitive as a low cost service provider in the industry………………………..
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