Hospital costs

Gotham city hospital unionized. In 2006 received an average annual Salary of $45,000. The hospital administrator is considering change in the contract with nurses for 2007. In turn, the hospital may also change the way it charges nursing costs to each department.

The hospital each department accountable for its financial performance and it allocates     revenues and expenses to departments. Consider the expenses of the obstetrics department in 2006.

Variable expenses (based on 2006 patient-days) are:

Meals

$610.000

Laundry

260.000

Laboratory

900.000

Pharmacy

850.000

Maintenance

150.000

Other

530.000

Total

$ 3.300.000

 Fixed expenses (based on number of beds) are:

      Rent

$ 3.300.000

General administrative  services

2.200.000

 Janitorial

200.000

 Maintenance

150.000

 Other

350.000

 Total

$ 5.900.000

Management assigns nurses to departments on the basis of annual patient-days as follows:

Volume Level in Patient-days

Number of Nurses

10.000-12.000

30

12.001-16.000

35

Total patient-days are the number of patient multiplied by the number of days they are hospitalized. The hospital charges each department for the salaries of the nurses assigned to it.
During 2006, the obstetrics department had a capacity of 60 beds, billed each patient an average of $810 per day, and had revenues of $12, 15 million.

Questions

$11.     Compute the 2006 volume of activity in patient-days.

$12.     Compute the 2006 patient-days that would have been necessary for the obstetrics department to recoup all fixed expenses except nursing expenses.

$13.     Compute the 2006 patient-days that would have been necessary for the obstetrics department to breakeven including nurses salaries as fixed cost.

$14.     Suppose obstetrics must pay $200 per patient-day for nursing services. This plan would replace the two-level, fixed –cost system employed in 2006.compute what the break-even point in patient-days would have been in 2006 under this plan.

Answer

$11.       $12,150,000= 15,000 patient-days

                  $810

$12.       Variable costs = $3,300,000 = $220 per patient-day

                                         15,000

Contribution margin = $810 - $220 = $590 per patient-day

To recoup the fixed expenses:

$5,900,000 ÷ $590 = 10,000 patient-days

$13.        The fixed cost levels differ as the relevant range changes:

Patient-Days

Non-Nursing

Nursing

Total

Fixed Expenses

Fixed Expenses

Fixed Expenses

10,000-12,000

$5,900,000

$1,350,000(1)

$7,250,000

12,001-16,000

5,900,000

1,575,000(2)

7,475,000

(1) $45,000 x 30 = $1,350,000

(2) $45,000 x 35 = $1,575,000

To break even on higher level of fixed costs:

$7,250,000 ÷ $590 = 12,288 patient-days

This answer exceeds the higher-level maximum; therefore, this answer is infeasible.

The department must operate at a $7,475,000 level of fixed costs to break even:

$7,475,000 ÷ $590 = 12,669 patient-days.

$14.       The nursing costs would have been variable instead of fixed. The contribution margin per patient-day would have been $810 - $220 - $200 = $390. The break-even point would be higher: $5,900,000 ÷ 390 = 15,128 patient-days.

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