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)

Dietary .....................................................$.....600,000 Janitorial ....................................................... Laundry ........................................................300,000 Laboratory 450,000 Pharmacy ......................................................350,000 Repairs and maintenance............................... General and administrative ........................... Rent............................................................... Billings and collections ................................ 300,000

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

Bed Capacity (fixed)

$ 70,000

30,000 1,300,000 1,500,000

$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:

Supervising nurses ................... Nurses ....................................... Aides ........................................

Annual Salaries

$25,000 20,000 9,000

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

Annual Patient Days Aides

Up to 21,900 .............................................2..0. 21,900 to 26,000 ................................ 26 26,001 to 29,200 ................................ 30

Nurses Supervising Nurses

10 4 13 4 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, 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,
3. 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.
4. 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. Preparing 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