break-even analysis p15-32
Background
Melford Hospital operates a general hospital but rents space to separately owned entities rendering specialized services such as pediatrics and psychiatry. Melford charges each separate entity for patients' services (meals and laundry) and for administrative services (billing and collection). Space and bed rentals are fixed charges for the year, based on bed capacity rented to each entity.
For the year ended June 30, 2011, Melford charged the following costs to Pediatrics:
In addition to the above charges from Melford, pediatrics incurred annual salaries of $480,000 paid for supervising nurses, nurses, and assistants.
During the year ending in June 30, 2011, pediatrics charged each patient $300 per day, had a capacity of 60 beds and had revenues of $6,000,000 for 365 days. Pediatrics reached full capacity on 90 days during this period. It was estimated that the demand exceeded 80 beds during those 90 days. However, pediatrics did not rent additional beds from Melford during this period.
Based on the information given, we have the following contribution income statement for Pediatrics.
To calculate the variable cost per patient per day, we first find the ratio to sales based on the total Revenues and total Variable costs.
So variable cost (VC) per patient per day = $300 x 0.333 = $100
Break Even Analysis for Question a
To calculate the minimum number of patient-days for pediatrics to break even, for the year ending June 30, 2012, we know that no additional beds will be rented. We also know that patient demand is unknown and that other factors remain the same as for the year ending in June 30, 2011.
Based on what we know so far, we use the pX = a + bX formula to get the break-even point, in which X = Minimum Number of Patient-Days, a = Total Fixed Costs, b = variable costs per patient per day (pppd) and p = Revenue per patient per day (pppd).
So Break-Even Patient Days = Fixed
Melford Hospital operates a general hospital but rents space to separately owned entities rendering specialized services such as pediatrics and psychiatry. Melford charges each separate entity for patients' services (meals and laundry) and for administrative services (billing and collection). Space and bed rentals are fixed charges for the year, based on bed capacity rented to each entity.
For the year ended June 30, 2011, Melford charged the following costs to Pediatrics:
In addition to the above charges from Melford, pediatrics incurred annual salaries of $480,000 paid for supervising nurses, nurses, and assistants.
During the year ending in June 30, 2011, pediatrics charged each patient $300 per day, had a capacity of 60 beds and had revenues of $6,000,000 for 365 days. Pediatrics reached full capacity on 90 days during this period. It was estimated that the demand exceeded 80 beds during those 90 days. However, pediatrics did not rent additional beds from Melford during this period.
Based on the information given, we have the following contribution income statement for Pediatrics.
To calculate the variable cost per patient per day, we first find the ratio to sales based on the total Revenues and total Variable costs.
So variable cost (VC) per patient per day = $300 x 0.333 = $100
Break Even Analysis for Question a
To calculate the minimum number of patient-days for pediatrics to break even, for the year ending June 30, 2012, we know that no additional beds will be rented. We also know that patient demand is unknown and that other factors remain the same as for the year ending in June 30, 2011.
Based on what we know so far, we use the pX = a + bX formula to get the break-even point, in which X = Minimum Number of Patient-Days, a = Total Fixed Costs, b = variable costs per patient per day (pppd) and p = Revenue per patient per day (pppd).
So Break-Even Patient Days = Fixed