Cost-Volume-Profit problem

Cost-Volume-Profit Analysis and Strategy II

Melford Hospital operates a general hospital, but rents space and beds
to separately-owned entities rendering specialized services such as
pediatrics and psychiatric care. Melford charges each separate entity
for common services such as patients' meals and laundry, and for
administrative services such as billings and collections. Space and bed
rentals are fixed charges for the year, based on bed capacity rented to
each entity.

Melford charged the following costs to pediatrics for the year ended
June 30,19X2:

Patient Days Bed Capacity (Variable)

Bed Capacity (Fixed)

Dietary ............................. ....... $ 600,000

Janitorial .................................

$ 70,000

Laundry .:......:..........:......:.....:. 300,000

Laboratory 450,000

Pharmacy ..:.:.:.........:..:........... 350,000

Repairs and maintenance ........

30,000

General and administrative .....

1,300,000

Rent ........................................

1,500,000

Billings and collections............. 300.000

Total .................,.................. $2,000,000 $2.900,000



During the year ended June 30, 19X2, pediatrics charged each patient an
average of $300 per day, had a capacity of 60 beds, and had revenue of
$6,000,000 for 365 days.. In addition, pediatrics directly employed the
following personnel:

Annual Salaries

Supervising nurses .:.....:...... $25,000

Nurses ................................ 20,000

Aides .............:.................... 9,000



Melford has the following minimum departmental personnel requirements
based on total annual patients days:

Annual Patient Days Aides Nurses Supervising Nurses

Up to 21,900 20 10 4

21,900 to 26,000 26 13 4

26,001 to 29,200 30 15 4



These staffing levels represent full-time equivalents. Pediatrics always
employs only the minimum number of required full-time personnel.
Salaries of supervising nurses, nurses, and aides are therefore fixed
within ranges of annual patient days.

Pediatrics operated at 100% capacity on 90 days during the year ended
June 30, 19X2. It is estimated that during these 90 days the demand
exceeded 20 patients more than capacity. Melford has an additional 20
beds available for rent for the year ending June 30,19X3. Such
additional rental would increase pediatrics' fixed charges based on bed
capacity.

REQUIRED:

1. What is the strategic role of CVP analysis for Melford hospital?

2. Determine the minimum number of patient days required for pediatrics
to breakeven for the year ending June 30,19X3, if the additional 20 beds
are not rented. Patient demand is unknown, but assume that revenue per
patient day, cost per patient day, cost per bed, and salary rates will
remain the same as for the year ended June 30, 19X2.

3. Assume that patient demand, revenue, revenue per patient day, cost
per patient day, cost per bed, and salary rates for the year ending June
30, remain the same as for the year ended June 30, 19X2. Prepare a
schedule of increase in revenue and increase in costs for the year
ending June 30, 19X3, in order to determine the net increase or decrease
in earnings from the additional 20 beds if pediatrics rents this extra
capacity from Melford.