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.
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
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.
24 May 2012 Case 4 Team 2Figure 2 contains a new breakeven graph built from the data in Table 2 for a total of 80 beds. This graphagain shows how profit and loss change, this time in relation to the new breakeven point of 21,733patient days. Figure 2. Breakeven graph for 80 beds $12,000,000 21,800 $10,000,000 Profit $8,000,000 21,733 $6,000,000 $4,000,000 $13,333 Loss $2,000,000 $0 0 6,000 12,000 18,000 24,000 30,000 36,000 Patient Days Total Cost SalesThe 80 total beds would lead to an increase in annual patient days which directly results in an increase inboth fixed and variable costs; however, the amount of labor would remain the same as that required for60 beds. However, from Table 2 it is clear that keeping patient demand constant, as the number of bedsis increased, the profit decreases linearly at an annual rate of approximately $30,000 per bed.RecommendationsSeveral alternative strategies were discussed that can help Melford Hospitals pediatrics become moreprofitable as the number of beds is increased, but some ideas were not necessarily in line with all of thehospitals overall goals. For instance, instead of adding 20 beds, the number of beds could be reducedfrom 60 to 54, raising the unit’s percent occupancy from 91% to 99% which would help increase thehospitals annual net income. Though this would seem like a smart business decision financially as itmaximizes profit at the current demand, it conflicts with one of the hospitals main goals to not turn awaypatients. Another suggestion was made to share the additional 20 beds with another section of thehospital, for instance the psychiatric care unit. This would seem logical to help split costs among theunits, but each entity is separately owned and this could lead to a conflict of interest in patientscheduling. Another option would be for the hospitals pediatric unit to increase their advertisingbudget, but unfortunately the estimated ROI is unknown with the currently available information.After reviewing all the options discussed the hospital has decided to add an additional 20 beds, andmake them available to an outpatient Pediatric Surgical Associates group on an as-needed availabilitybasis. This unit was also found to have additional capacity that was not able to be accommodated withtheir current facilities. Their surgeons will perform minor pediatric surgeries utilizing up to the 20 beds
24 May 2012 Case 4 Team 2for pre-operative and post-operative needs. The patients will be brought in for preparation beforesurgery into this new 20 bed wing and sent to the hospital operating room for procedure. The patientswill return to the wing to recover post-operatively for an additional short period of time as needed,before being discharged.Under this model, it is anticipated that each of the beds Melford Hospital 80 Bedswill be utilized an average of 2-4 times per day by patients Pediatric Bed Analysis Variable Fixedneeding same-day surgery. This will increase the Patient Days Bed Capacity Fixed and Variable Costs 26,000 80profitability per bed. The Surgical group will likely notreach full capacity of all beds each day. Therefore, Dietary 780,000potential overflow of patients from the pediatric unit Janitorial 93,333needing to stay longer than a day can be moved into one Laundry 390,000 Laboratory 585,000of these conveniently located beds. This will address Pharmacy 455,000the excess demand of pediatric patient beds during Repairs and Maintenance 40,000times of increased capacity. The pediatric main unit and General and Administrative 1,733,333the surgical group will coordinate the scheduling of Rent 2,000,000patients so that all patients’ needs are met and turnover Billings and Collections 390,000of the beds is maximized. Total 2,600,000 3,866,667 Labor CostsThe cost of the out-patient meals, laundry and Aides 207,000administrative services, including billing and Nurses 240,000collections, will be billed separately to the group. Supervising Nurses 100,000Laboratory and pharmacy services for the 20 beds Total Labor 547,000occupied by the surgical group will be billed to the Total Fixed Costs 4,413,667group as well. Janitorial, repairs and maintenance willbe included in the cost of rental per bed. The rental 4,413,667cost per bed will be increased slightly to increase (300 - 100)profitability. Labor costs will increase to accommodate Breakeven Analysisthe additional volume during the day and will be billed 22,068 Patient Daysto the group. Conservatively estimating that thecontribution margin for each bed will remain the same Income Statementas the inpatient margin ($200) and assuming that the Sales 7,800,000Surgical group will be able to generate an additional Variable Costs 2,600,0004,200 patient day equivalents, annual profit for the year Gross Profit 5,200,000ending June 30, 2003 will be $786,333. These numbers Fixed Costs 4,413,667are reflected in the updated breakeven graph shown Net Income 786,333below in Figure 3.
24 May 2012 Case 4 Team 2$12,000,000 26,000$10,000,000 Profit $8,000,000 21,733 $6,000,000 $786,333 $4,000,000 Loss $2,000,000 $0 0 6,000 12,000 18,000 24,000 30,000 36,000 Patient Days Total Cost Sales Figure 3. Breakeven graph for 80 beds following recommendation