1. Internal/External Sales Rate Development Level III

2. Session Objectives Understand the rate development process
Determine what costs are allowed in the rate development
Rate development example

3. Policy The purpose of the internal sales guidelines are to:
Fully recover but not exceed costs
Recommend best business practices
Include all subsidies in rate development
Rates are established to breakeven
Based on total cost 3

4. Agenda Capital Equipment Capital Lease Operating Lease
Partial Assignments
Surplus and Deficits 4

5. Agenda Prepaid Expenses Discounted rates After Hours rates
Assisted vs. Unassisted rates
Carryforward Balance reconciliation
Rate Development Example 5

6. Capital Equipment
Depreciation expense associated with capital equipment should be included in the rate development.
Annual depreciation is calculated in the Asset Management module and reported in the Asset Management Depreciation Schedule.
Total purchase price, installation and transportation expenses are included in the acquisition cost and are capitalized. 6

7. Capital Equipment - Example
Capitalized Expense = Annual Depreciation Expense
Useful Life
$100,000 = $20,000 per year
5 years
$20,000 = $16.64 per hour additional cost recovery
1202 billable hours 7

8. Capital Lease
Depreciation associated with capital lease should be included in the rate development.
The cost is based on capitalized cost of the equipment, not the monthly lease payments.
Depreciation is calculated in the Asset Management module.
Total purchase price, installation, transportation, interest charges and fee expenses are included in the acquisition cost. 8

9. Capital Lease - Example
Capitalized Lease = Annual Depreciation Expense
Useful Life
$105,000 = $21,000 per year
5 years
$21,000 = $17.47 per hour additional cost recovery
1202 billable hours 9

10. Operating Lease
Expense associated with operating lease should be included in the rate development based on annual lease payments.
Total lease payments include the cost for use of the equipment, interest and fees and may include installation, transportation or maintenance expenses. 10

11. Operating Lease - Example
Lease Expense = Annual Lease Expense
Term of Lease
$100,000 = $20,000 per year
5 years
$20,000 = $16.64 per month additional cost recovery
1202 billable hours 11

12. Partial Assignment – Salary and Fringe Rates
67% -100% appointments:
Fringe Rate: 33.7% Academic, 27.4% Non-Academic
Nonproductive time: prorated based on appointment
0% -66% appointments:
Fringe Rate: reduced rate 7.9% Partial, 17.6% for GA Health and 22.4% with UPlan Health
Nonproductive time: prorated based on appointment and reduced benefits 12

13. Partial Assignments Hourly Rates13

14. Partial Assignments Hourly Rates14

15. Reconciled Surplus & Deficits Balances in Rates
An acceptable operating variance:
Reconciled Year-End Variance = Plus or minus 15%
Revenue
Within 15% and due to variance in costs or volumes from original estimates
Rates are calculated to breakeven
Reconcile outstanding invoices, prepaid maintenance contracts, materials and supplies not consumed, material for resale, (items paid for but not matched to revenue recognized). 15

16. Surplus & Deficits Balances in Rates
An operating variance that requires adjustment:
Subtract unallowable costs, adjust salary expense based on actual usage, reconcile depreciation expense, and add revenue not recognized, subsidies not recorded, etc. 16

17. Surplus & Deficits Balances in Rates
If a surplus results from overcharging, customers will need to be refunded if greater than 15%
It’s important to be able to separately identify External and Internal Sales and expenses & reconcile balance at year end 17

18. Surplus & Deficits Balances in Rates
A deficit balance may develop from:
sales < expected
costs > expected
If a deficit is due to expenses that are not recoverable or not included in the rates, a subsidy will be required 18

19. Rate Development Determine the per-unit rate
Direct costs +/- reconciled surplus or deficit
Per unit rate =
Estimated volume of work 19

20. Prepaids
Expenses paid but not used in current year because the value received for those resources are in the future beyond current fiscal year
Charged at the purchase price
Example:
$25,000 service agreement = $8,333 current year
3 years
$16,667 for future years or $8,333 per year will be included in the rates for the next two fiscal years 20

21. Prepaids Maintenance Contracts Service Contracts
Consulting or Professional Services
Insurance
Materials for Resale, Stores and Supplies
Postage
Subsidies applied in advance 21

22. Discounting
Discounting is allowed if the increase in volumes decreases the per unit cost
The decrease in cost is directly related to the activity
All discounts are applied equally
One customer can’t pay for the discount of another
Example: units cost $1.00 per unit
1000 units cost $0.75 per unit 22

23. Discounting
Charge labor, supplies and equipment on a hourly basis rather than by units.
If there is a benefit to processing more units the discount will be applied by fewer hours charged.
If activities have a different cost structure (set up time versus run time for equipment) develop a rate for each and charge accordingly. 23

24. After Hours
Rates can be different if the cost associated with the activity is different
The cost for after hours service is lower because staff assistance is not required or available
All support costs and non-productive time are applied over entire base
One customer can’t pay for the reduced cost of another (Net revenue is the same for the recharge center) 24

25. After Hours Example: Regular Hours:
$93,750 (includes operator, support and equipment) cost divided by 1202 hours equals $78.00 per hour
After Hours:
$35,000 (includes support and equipment exclude operator ) cost divided by 845 hours equals $41.42 per hour 25

26. After Hours 26

27. Assisted vs. Unassisted
Rates can be different if the cost associated with the activity is different
All support costs and non-productive time are applied over entire base
One customer can’t pay for the reduced cost of another (net revenue is the same) 27

28. Assisted vs. Unassisted
Example:
Assisted :
$100,000 (includes support, operator and equipment) cost divided by 1202 hours equals $83.19 per hour
Unassisted:
$10,000 (includes support less operator and equipment) cost divided by 791 hours equals $36.35 per hour 28

29. Unassisted Hours 29

30. Carryforward Reconciliation
See Internal Sales Activity Reconciliation Template. 30

31. Resources Office of Internal Sales website
This presentation is posted on the site. 31