Page 4 - CIMA MCS Workbook February 2019 - Day 1 Suggested Solutions

CIMA FEBRUARY 2019 – MANAGEMENT CASE STUDY

CHAPTER FOUR

1. RESPONSIBILITY CENTRES

a) Cost centres, profit centres and investment centres

A cost centre is where the manager of a business unit only has control over costs and is therefore
responsible for the way they manage the costs of the centre. The centre either doesn’t generate
any revenues or its manager doesn’t have control over them. The manager would not be able to
make capital investment decisions in relation to the unit. Evaluation would be on the basis of cost
control and efficiency levels. Targets would be set for such things as maximum spend levels,
maximising productivity and minimising downtime.

For dental practices operating as cost centres, managers would potentially control decisions such
as salaries offered to staff, the level of training spend and the choice of suppliers for materials
such as consumables.

A profit centre is where, in addition to the control of costs, the manager also has control over
revenues. This may mean being able to set prices or have control of a marketing budget to
influence sales volumes.

Managers of profit centres can be evaluated on the same things as cost centre managers, but also
on anything related to revenue or profit. So they could have targets set for profit margins or sales
volume growth on top of the cost targets.

As a profit centre manager, practice heads would be able to make decisions on local advertising
and marketing activities, types of service provided and the prices of the services.

Investment centre managers have control over both revenues and costs and in addition they are
able to make capital investment decisions for the centre. This means that, in addition to the
measures used to evaluate the profit centre heads, they can be evaluated on return on capital
and residual income to evaluate the result of their use of the centres capital funds.

In addition to the types of decision made by practice heads as profit centre managers, as
investment centres, the heads would potentially be able to make decisions on the purchase of
new capital equipment, such as dentist’s chairs or furniture for reception.

b) Likely status of Crowncare’s practices

It is not clear how Crowncare’s practices operate in terms of the type of centres they are.

Information we have been told:

Each practice covers a particular local area and as such has a natural catchment area, but patients
are not exclusive to this area.

Each practice is incorporated as a wholly owned subsidiary.

54 KAPLAN PUBLISHING