With the recent changes in healthcare, hospitals have been under increasing pressure to reduce costs. You have been hired by Best Care Hospital to assist in negotiating the 2016contract with the nurses. Based on the terms of the nursing contract, the hospital may need to change the way they charge the various hospital departments. Your job is to advise the hospital onwhether they insist on a contract that allows the hospital to continue with the existing two-level fixed cost system for charging nursing services to the various hospital departments or toaccept a contract that would cause them toswitch to a variable cost system.
You are provided with the following information:
In 2015, the nurses received an average annual salary of $45,000. The hospital holds each department accountable for its financial performance, and it records revenues and expense by departments. Consider the expenses of the pediatrics department in 2015.
Variable expenses (based on 2015 patient days) are as follows:
Variable expenses:
Meals $ 610,000
Laundry $260,000
Laboratory $900,000
Pharmacy $850,000
Maintenance $150,000
Other $530,000
Total $ 3,300,000
Fixed expenses (based on number of beds) are as follows:
Rent $ 3,000,000
General administrative services $2,200,000
Janitorial $200,000
Maintenance $150,000
Other $350,000
Total $ 5,900,000
Management assigns nurses to department on the basis on annual patient-days as follows:
Volume Level in Patient-Days: # Nurses
$10,000-12,000 30
12,001-16,000 35
Total patient-days are the number of patients multiplied by the number of days they are hospitalized. The hospital charges each department for the salaries of the nurses assigned to it.
During 2015, the pediatrics department had a capacity of 60 beds, billed each patient an average of $810 per day, and had revenues of $12.15 million.
Q: Suppose pediatrics must pay $200 per patient -day for nursing services. This plan would replace the two -level, fixed cost system employed in 2015. Compute what the break -even point in patient -days would have been in 2015 under this plan.
