7. Your firm, General Hospital is a not-for-profit, acute care facility which ha

Question

7. Your firm, General Hospital is a not-for-profit, acute care facility which has the following cost structure for its inpatient services. Your job is to determine based on your extensive knowledge of Cost behavior and profit analysis theory and concepts what solutions you would recommend to the Hospital CEO based on the following:

                             Fixed costs                                    $10,000,000

                             Variable cost per inpatient day                   $200                

                   Charge (revenue) per inpatient day          $1,000

     **Furthermore, assume that the Department expects a patient load of 15,000 inpatient days in coming      year.

a. Construct the Hospital

Explanation / Answer

a)

Base case Projected profit and loss statement

Sales (15000*$1000) ....................................................... $15,000,000

Less:

Variable Cost (15000*$200) ................ ($3,000,000)

Fixed Cost ............................................. ($10,000,000)

Net Profit ............................................................................ $2,000,000

b)

conribution margin per unit = 1000 - 200 = $800

for base case

contribution margin = 800 * 15000 = $12,000,000

Break even point = Fixed assets/contribution margin per unit

= 10,000,000/800 = 12500 patients

c)

required volume = (fixed cost + desired profit)/contribution margin per unit

for profit of 1,000,000

volume = 11,000,000/800 = 13,750 patients

for a profit of 500,000

volume = 10,500,000/800 = 13,125 patients

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