Case 09-3: Cost-Volume-Profit (CVP) Analysis and Strategy 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, 2013: Patient Days (variable) Bed Capacity (fixed) $ 600,000 $ 70,000 Dietary Janitorial Laundry Laboratory Pharmacy Repairs and maintenance.. General and administrative 300,000 450,000 350,000 30,000 1,300,000 1,500,000 Rent ..... Billings and collections Total .... 300,000 $2,000,000 $2,900,000 During the year ended June 30, 2013, 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 21,900 to 26,000 26,001 to 29,200 20 26 30 10 13 15 4 4 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, 2013. 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, 2014. Such additional rental would increase pediatrics' fixed charges based on bed capacity. REQUIRED: 1. What is the strategic role of CVP analysis for the pediatrics unit of Melford hospital? 2. Determine the minimum number of patient days required for pediatrics to breakeven for the year ending June 30, 2014, if the additional 20 beds are not rented. Patient demand is unknown, but you can 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, 2013. 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, 2011 remain the same as for the year ended June 30, 2013. Prepare a schedule of increase in revenue and increase in costs for the year ending June 30, 2014, in order to determine the net increase or decrease in earnings from the additional 20 beds if pediatrics rents this extra capacity from Melford. Case 09-3: Cost-Volume-Profit (CVP) Analysis and Strategy 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, 2013: Patient Days (variable) Bed Capacity (fixed) $ 600,000 $ 70,000 Dietary Janitorial Laundry Laboratory Pharmacy Repairs and maintenance.. General and administrative 300,000 450,000 350,000 30,000 1,300,000 1,500,000 Rent ..... Billings and collections Total .... 300,000 $2,000,000 $2,900,000 During the year ended June 30, 2013, 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 21,900 to 26,000 26,001 to 29,200 20 26 30 10 13 15 4 4 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, 2013. 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, 2014. Such additional rental would increase pediatrics' fixed charges based on bed capacity. REQUIRED: 1. What is the strategic role of CVP analysis for the pediatrics unit of Melford hospital? 2. Determine the minimum number of patient days required for pediatrics to breakeven for the year ending June 30, 2014, if the additional 20 beds are not rented. Patient demand is unknown, but you can 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, 2013. 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, 2011 remain the same as for the year ended June 30, 2013. Prepare a schedule of increase in revenue and increase in costs for the year ending June 30, 2014, in order to determine the net increase or decrease in earnings from the additional 20 beds if pediatrics rents this extra capacity from Melford