Break-Even Analysis in a Not-for-Profit Organization (LO3)

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 (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, 2011:

Patient Services Bed Capacity

(Variable) _ (Fixed)

DIETARY. 2. Sato ech ee $ 600,000 JENUOREN a Nae e ee eee $ 70,000

[KEWINSIAY, on. Ceo LCG 300,000 AD OLALOMVE eeunientistGeoen cauabceoeetveles.y dal ed 450,000 PIREVIITETOW. 3 3 arent 5 yee cree gee en ae 350,000 Repairs and maintenance............ 30,000 General and administrative........... 1,300,000 RENWREMee eee eee fe 1,500,000 Billings and collections.............. 300,000 UGE lls puis Sig Se arora ae nee $2,000,000 $2,900,000 In addition to these charges from Melford Hospital, Pediatrics incurred the following personnel costs:

a _ Annual Salaries*

Supervising nurses... .. $100,000 INRISESS: chess oreo cree ces 200,000 IASSISTANISR ee steieo. cots 180,000 ROLaleEMe stent esa $480,000

* These salaries are fixed within the ranges of annual patient-days considered in this problem.

During the year ended 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 operated at 100 percent capacity on 90 days during this period. It is estimated that during these 90 days, the demand exceeded 80 beds. Melford has 20 additional beds available for rent for the year ending June 30, 2012. This additional rental would proportionately increase Pediatrics’ annual fixed charges based on bed capacity.

Required

a. Calculate the minimum number of patient-days required for Pediatrics to break even for the year ending June 30, 2012, if the additional 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 for the year ending June 30, 2012, remain the same as for the year ended June 30, 2011.

b. Assume Pediatrics rents the extra 20-bed capacity from Melford. Determine the net increase or decrease in earnings by preparing a schedule of increases in revenues and costs for the year ending June 30, 2012. Assume that patient demand, revenue per patient-day, cost per patient-day, cost per bed, and salary rates remain the same as for the year ended June 30, 2011.

(CPA adapted)