Short-Term Profit Planning and Capital Budgeting Analysis: A Case in the Health Service Sector in Peru

• In Event: Case Studies

Abstract

There is a severe shortage of published research on management accounting in developing countries, particularly in the health service sector. This is a problem, as theory and practice based on research conducted in and considered standard in developed countries may be unsuited to actual conditions in developing countries.
This paper aims to help address this shortage by investigating an actual case of short-term profit planning and capital budgeting at a Peruvian SME operating in the health service sector. The purpose of the paper is two-fold. First, we analyze short-term planning, including contribution margin analysis, cost-profit-volume analysis, and break-even analysis. Second, we discuss capital budgeting decision-making for SMEs from a comprehensive perspective.
Contributions of the paper include: (1) it demonstrates how theory that is widely-used globally may have to be adapted to the specific realities of individual countries; (2) it demonstrates how the same costs can be classified as either as fixed or variable, depending on whether the analysis is short-term or long-term; (3) it shows how the criteria for evaluating projects can vary depending on the country, firm size, and other characteristics (e.g., managers of Peruvian SMEs prefer to use payback period as the primary financial indicator); and (4) it demonstrates that evaluation of an investment project requires expertise from various disciplines, including economics, engineering, financial accounting, tax accounting, and cost accounting.

Keywords: Breakeven point, Capital Budgeting, health sector in Peru

Authors

• Gustavo A. Tanaka, Kyoto University of Foreign Studies

• Sergio Cherres, Pontificia Universidad Catolica del Peru