Case 4 – Melford                                                                                                          ...
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Executive Summary Case 4 Melford


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Executive Summary Case 4 Melford

  1. 1. Case 4 – Melford 24 May 2012 Group 2 Executive SummaryProblem StatementThe Cost-Volume-Profit (CVP) analysis plays a strategic role for both breakeven and profitforecasts under various operating scenarios. Due to operating at a 100% capacity on 90 daysduring the previous year, Melford Hospitals pediatrics estimated to have a demand that exceeded20 patients more than their max capacity during these 90 days. By using the CVP method,Melford Hospitals pediatric care unit can more accurately determine the amount of annualpatient days and total bed capacity needed in order to breakeven and maximize profit byincreasing their amount of beds by 20 to meet this increase in demand.CVP AnalysisThe CVP breakeven analysis was performed to determine the number of patient days required tobalance the total revenue and costs, thus yielding an operating profit of zero. The followinglogic and resulting equation were used to determine the breakeven point: Sales = Fixed Cost + Total Variable Cost + Operating Profit Q = F / (p – v) 60 Beds 80 Beds Recommended Pt $12,000,000 $12,000,000 26,000 20,000 $10,000,000 BE Pt $10,000,000 Profit BE Pt $8,000,000 21,733 $8,000,000 Profit 16,900 $6,000,000 $6,000,000 P2 $786,333 Profit $4,000,000 $786,33 $4,000,000 $620,000 $620,00 Loss P1 $2,000,000 Loss $2,000,000 $13,333 $0 $0 0 6,000 12,000 18,000 24,000 30,000 36,000 0 6,000 12,000 18,000 24,000 30,000 36,000 Patient Days Patient Days Total Cost Sales Total Cost SalesAs seen shown in the graphs, adding the additional 20 beds results in an increase in the amountof annual patient days, which significantly decreases the pediatrics’ profit margin. Net incomegoes from $620,000 to $13,333 due to increases in both the pediatrics fixed and variable costswhile total labor actually stays the same. This problem is overcome by our recommendation.RecommendationAfter reviewing several options, the hospital has decided to add an additional 20 beds. The bedswill be made available to an outpatient Pediatric Surgical Associates group that also hadadditional need, and this will be done on an as-needed, availability basis for inpatient recovery.Both units will coordinate the scheduling of patients so that all patients’ needs are met. The costincreases for the additional beds will ultimately be shared fairly between the two groups as theyare incurred on a usage rate basis. Additionally, the rental cost per bed will be increased slightlyto increase profitability. Conservatively estimating that the contribution margin for each bed willremain the same as the inpatient margin ($200) and assuming that the Surgical group will be ableto generate an additional 4,200 patient day equivalents, annual profit for the year ending June 30,2003 will be $786,333, as shown at point P2 with approximately 26,000 patient days on the 80beds graph.