Angels of Mercy Mission Hospital operates on charity basis. The hospitals board of directors has recently complained about the increasing size of the cost budget insisting that the management should cut down on costs. The major concern of the board is the cost of maintaining patients at the intensive care unit (ICU). The following information is available on the operations of the hospital:

1. The average cost of maintaining a patient at the ICU per week is Sh.200, 000 compared to Sh.100, 000 per week incurred in maintaining a patient at the high dependency unit (HDU) and Sh.50, 000 per week of maintaining a patient at the general wad (GW)

2. Past information on patients indicates that:

(i) 50% of the patients in ICU at the beginning of the week will remain in ICU at the end of the week and 50% will be transferred to HDU by the end of the week.

(ii) 10% of the patients in HDU at the beginning of the week will be transferred to ICU, 50% will remain in HDU, and 40% will be transferred to GW.

(iii) 85 % of the patients in the GW at the beginning of the week will remain in GW at the end of the week, 10% will be transferred to HDU and 5% to ICU.

3. The board of directors believe that the criteria for maintaining patients in the ICU is too strict and should be relaxed so that only 40% of the patients in ICU at the beginning of the week remain there at the end of the week while 60% are transferred to HDU.

4. The staff at the hospital insist that if the proposed criterion is adopted:

(i) 20% of patients in HDU at the beginning of the week will be transferred to ICU, 50% will remain in HDU while only 30% will be transferred to GW.

(ii) No changes will be expected in the GW.

5. Past hospital records indicate that the hospital serves an average of 4,000 patients weekly.

Required:

(a) The steady state weekly costs under the current policy. (7 marks)

(b) The steady state weekly costs under the proposed policy. (7 marks)

(c) Advise the board on the best policy. (2 marks)

(d) State the limitations of the quantitative technique used in solving problems (a) and (b) above. (4 marks)