Question

University Hospital has two separate units that are part of the hospital but are two separate facilities. The first is the main hospital that performs emergency room functions, surgeries, and recovery. Separate from the main hospital is an outpatient surgery center. In an effort to control costs, some of the patients that need minor surgeries are routed to the outpatient surgery center. The outpatient surgery center treats patients in three activity centers: (1) Surgery, (2) Phase I recovery, where patients recover while the patients are still asleep, (3) Phase II recovery, where patients recover while they are awake. Phase II recovery ends when the patients go home. Daily capacities and production levels are as follows.

	surgery	phase i recovery	phase ii recovery
Daily Capacity (surgeries)	40	30	60
Daily Production (surgeries)	30	30	30

The hospital receives an average of $1,000 per surgery. (The surgeon’s fee and the anesthesiologist’s fee are billed separately.) The variable cost per surgery is $300. There is sufficient demand for surgeries that the hospital could perform 60 surgeries per day. Surgeries not performed by the outpatient surgery center are sent to the main hospital’s regular surgery rooms. The variable cost per surgery for regular surgery in the main hospital is $700, while the hospital still receives $1,000 per surgery. The hospital management is considering the following alternatives:

1. Continue performing 30 surgeries per day at the outpatient surgery center and send the other 30 patients per day to the main hospital’s regular surgery rooms.

2. Remodel the outpatient recovery rooms so that some of the Phase II space could be used for Phase I recovery. This would cost $2,000 per day and enable the outpatient surgery center to perform 40 surgeries per day. They would then send 20 patients to the hospital’s regular operating rooms.

3. Expand the facilities of the outpatient surgery center at a differential cost of $15,000 per day so that it could perform 60 surgeries per day, and service 60 patients per day in Phase I recovery. That would mean the hospital would service 60 patients per day in Phase II recovery.

Which choice should the hospital make and why? (please demonstrate in an income statement)

Answer 1

Conclusion:-

Income earned per day in the given alternatives are;

1. $ 30,000

2. $ 32,000

3. $ 27,000

Hence Alternative 2 should be choosed by the hospital as it gives more income to the hospital.

Detailed working is hereby attached.