Problem 2. Cost-Volume-Profit Analysis Under Fee-For-Service

General Hospital, a not-for-profit acute care facility, has the following cost structure for its inpatient services:

• Fixed costs $10,000,000
• Variable cost per inpatient day 200
• Charge (revenue) per inpatient day 1,000
  1. Calculate the hospitals base case projected net profit or loss.

The hospital expects a patient load of 15,000 inpatient days next year.

Required:

1. Calculate the hospitals break-even point in inpatient days.
2. What volume (inpatient days) is required to earn a net profit of $1,000,000?
3. Twenty percent (20%) of the hospitals inpatient days come from a managed care plan that wants a 25% discount from charges. If the hospital does not agree, management assumes it will lose the inpatient days to another provider. From a financial viewpoint, should the hospital agree to the 25% discount proposal? Why? Why not?