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# Melford Written Analysis

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### Melford Written Analysis

1. 1. 24 May 2012 Case 4 Team 2 Melford Hospital CaseTeam 2: Rima LeBlanc, Kelly Austin, Alan Bucciero, Steve Gotshall, Kevin O’NeilIntroductionMelford Hospital offers several specialty practices, including Happy Times Pediatrics, and providesvarious materials, space and rental beds. Over the past year, Happy Times Pediatrics has noticedsubstantial periods of unused capacity. While at maximum capacity during ninety days out of the year,the group had to turn away twenty additional patients per day. This proposal addresses how to solve theshort term goal of accommodating the additional demand during those ninety days and offerssuggestions on how to maximize all of the unused beds over the remainder of the year. To accomplishthis, the Cost Volume Profit (CVP) analysis system was used to help determine the breakeven point andto predict future profit forecasts.Breakeven AnalysisCVP breakeven analysis was performed to determine the number of patient days required to balance thetotal revenue and costs, thus yielding an operating profit of zero. The following logic and resultingEquation 2 were used to determine this breakeven point.Breakeven Point: Sales = Fixed Cost + Total Variable Cost + Operating Profit Equation 1: p *Q = F + (v*Q) + N Equation 2: Q = (F + N) / (p – v) Where, Q = Number of patient days F = Total Fixed cost N = Operating profit (= 0) = Unit variable cost = PriceThe starting point of the analysis was evaluating the total fixed and variable costs for operating withsixty beds. After determining the total fixed costs of \$3,380,000, the above equation was used to solvefor the required number of patient days, which was found to be 16,900 days. Table 1 below shows theanalysis.
2. 2. 24 May 2012 Case 4 Team 2 Table 1. Breakeven analysis for 60 beds Melford Hospital 60 Beds Pediatric Bed Analysis Variable Fixed Patient Days Per PD Bed Capacity Per Bed Fixed and Variable Costs 20,000 60 Dietary 600,000 30.00 Janitorial 70,000 1,166.67 Laundry 300,000 15.00 Laboratory 450,000 22.50 Pharmacy 350,000 17.50 Repairs and Maintenance 30,000 500.00 General and Administrative 1,300,000 21,666.67 Rent 1,500,000 25,000.00 Billings and Collections 300,000 15.00 Total 2,000,000 100 2,900,000 48,333.33 Labor Costs Aides 9,000 20 180,000 Nurses 20,000 10 200,000 Supervising Nurses 25,000 4 100,000 Total Labor 480,000 Total Fixed Costs 3,380,000 Fixed Costs (Revenue per Day - Variable Cost per Day) 3,380,000 Breakeven Analysis (300 - 100) 16,900 Patient DaysThe data in the Table 1 above was used to create the graph in Figure 1 to show a summary pictorial ofthe breakeven point. From this graph it is very easy to see how profit and loss change as the number ofbeds filled varies from the breakeven point. Figure 1. Breakeven graph for 60 beds \$12,000,000 20,000 \$10,000,000 \$8,000,000 Profit 16,900 \$6,000,000 \$4,000,000 \$620,000 \$2,000,000 Loss \$0 0 6,000 12,000 18,000 24,000 30,000 36,000 Patient Days Total Cost Sales
3. 3. 24 May 2012 Case 4 Team 2Additional Capacity AnalysisWhile Melford is operating profitably (+\$620,000 per year) with the 60 current beds, there was excesscapacity of an additional 20 beds over part of the year that was not able to be accommodated. In orderto increase the number of patients admitted and at the same time increase profitability, a similar CVPanalysis was performed for increased numbers of beds. Table 2 shows a schedule of the costs andprofits based on the number of beds utilized, as beds vary from 60 to 80 total beds. Table 2. Breakeven schedule for 60, 70 and 80 beds Melford Hospital 60 Beds 70 Beds 80 Beds Pediatric Bed Analysis Variable Fixed Variable Fixed Variable Fixed Patient Days Bed Capacity Patient Days Bed Capacity Patient Days Bed Capacity Fixed and Variable Costs 20,000 60 20,900 70 21,800 80 Dietary 600,000 627,000 654,000 Janitorial 70,000 81,667 93,333 Laundry 300,000 313,500 327,000 Laboratory 450,000 470,250 490,500 Pharmacy 350,000 365,750 381,500 Repairs and Maintenance 30,000 35,000 40,000 General and Administrative 1,300,000 1,516,667 1,733,333 Rent 1,500,000 1,750,000 2,000,000 Billings and Collections 300,000 313,500 327,000 Total 2,000,000 2,900,000 2,090,000 3,383,333 2,180,000 3,866,667 Labor Costs Aides 9,000 180,000 180,000 180,000 Nurses 20,000 200,000 200,000 200,000 Supervising Nurses 25,000 100,000 100,000 100,000 Total Labor 480,000 480,000 480,000 Total Fixed Costs 3,380,000 3,863,333 4,346,667 3,380,000 3,863,333 4,346,667 (300 - 100) (300 - 100) (300 - 100) Breakeven Analysis 16,900 19,317 Patient Days 21,733 Patient Days Income Statement Sales 6,000,000 6,270,000 6,540,000 Variable Costs 2,000,000 2,090,000 2,180,000 Gross Profit 4,000,000 4,180,000 4,360,000 Fixed Costs 3,380,000 3,863,333 4,346,667 Net Income 620,000 316,667 13,333As the Pediatrics’ bed capacity increases, so do the care units fixed and variable costs resulting from theincrease in annual patient days.