Some profit centers also qualify as investment. centers. An Investment center profit center for which management has been given decision-making responsibility for making significant capital invcsuncnis related to the center’s business activities. This chapter’s opening story about Siemens AG explains how the top cxccutive, Heinrich von Pierer, created .16 business units. Those business units are investment centers. At Health corp, the hospital and its seven clinics arc considered investment centers as well us profit centers because the managers of each clinic and the hospital have . decision-making responsibility for profit center-related decisions atul for related capital investment chokes. Thus the’ hospital CEO and clinic managers could make major investment-related decisions, such us repaving the parking areas or purchasing new x-ray equipment. However, large strategic capital investments usually arc reserved for the board of directors. Deciding to build an eighth clinic or considering a merger with another hospital are decisions reserved for collaboration between top management and
the board.
case in point
To evaluate the performance of an investment center, it is necessary to measure objectively the cost of assets used in the center’s operations, The performance 91′ each investment center is evaluated using return on investment measurements. The most of these measures include (I) return 011 assets (ROA) and (2) residual income (RI).
Return on assets is calculated by dividing an investment center’s operating income (referred to as its responsibility margins by its average total assets for the period. For example, assume that Health corp’s 700-bed hospital recently generated 41 $12 million responsibility margin and utilized an average of $96 million in assets during the year. Thus, us un investment center, the hospital generated a 12.5% return on assets for the year, computed us follows
Return on Assets = $12 million + $96 million = 12.5%
Residual income is the amount by which the margin exceeds ,a minimum acceptable . return on the center’s assets. Residual income is computed as follows
Residual Income = Responsibility Margin – Minimum Acceptable Return
Let us assume that Health corp’s management has established a minimum ROA of 10% on all investment centers. Thus the residual income for its hospital is $2.4 million, as follows
Residual Income = $12 million – ($96 million x 10%)
= $2.4 million
case in point
Not all profit centers can be evaluated as investment centers. For example, if a profit center shares conunon facilities with other parts of the business, it may be difficult to determine the precise “amount of assets invested” ill the profit center. Thus. while profit centers that share common facilities cun be evaluated with respect to their profuabilit». they usually arc not evaluated in terms of-their refilm (/1/ assets or residual income
You as a Clinic Manager
