Question

In: Accounting

Helmert Hospital operates a general hospital but rents space to separately owned entities rendering specialized services...

Helmert Hospital operates a general hospital but rents space to separately owned entities rendering specialized services such as pediatrics and psychiatry.  
Helmert Hospital charges each separate entity for patients’ services (Meals and laundry) and for administrative services (billings and collections). Space and bed rentals are fixed charges for the year, based on bed capacity rented to each entity.  
Helmert Hospital charged the following costs to Pediatrics for the year ended June 30, 2018.  
Patient Services Bed Capacity
(Variable cost) (Fixed Cost)
Dietary $600,000
Janitorial $70,000
Laundry 300,000
Laboratory 410,000
Pharmacy 300,000
Repairs and maintenance 30,000
General and administrative 1,300,000
Rent 1,500,000
Billings and collections 250,000
Total $1,860,000 $2,900,000
In addition to these charges from Helping Hospital, Pediatrics incurred the following personnel costs.
Annual Salaries—these salaries are fixed
Supervising nurses $100,000
Nurses 320,000
Assistants 180,000
Total $600,000
During the year ended June 30, 2018, Pediatrics charged the following and had the following relevant days:
$500 daily charge to patient for services
$6,200,000 Total Revenues
35 Relevant Range of daily beds
Required: Prepare your solution on the Part 1 Solution Worksheet. You must provide cell references to this worksheet to earn credit.

1. Prepare a contribution income statement for Pediatrics for the year ended June 30, 2018.

Peidatrics
Contribution Income statement
For the year ended June 30, 2018
Revenue
Less Variable Costs:
Patient Services
Contribution Margin
Less Fixed Costs:
Bed Capacity costs
Personnel costs
Profit
2. Calculate the number of patient-days that Pediatrics generated for the year ended June 30, 2018.  
3. Compute the contribution margin per patient days generated for the year ended June 30, 2018.
4. Calculate the minimum number of patient-days required for Pediatrics to break even for the upcoming year June 30, 2019.   Assume that revenue per patient-day, cost per patient-day,
cost per bed and salary rates for this upcoming year June 30, 2019, remain the same as for the year ended June 30, 2018.  
5. Calculate the operating leverage ratio.
6. If demand for patient days are projected to increase from the 2018 current patient demand in 2019: 6%
Calculate the increase in income using the operating leverage.

7. Prepare a contribution income statement showing the projected 2019 revenue and costs if the demand for patient days increases in 2019 to the projected increase stated in #6.

Pediatrics
Contribution Income statement
For the year ended June 30, 2019
Revenue
Less Variable Costs:
Patient Services
Contribution Margin
Less Fixed Costs:
Bed Capacity costs
Personnel costs
Profit
8. Using the profit for end of year June 30, 2018 and June 30, 2019, prove that the change in income between the two years equals the percentage change in #6.
9. Recommend to Pediatrics what they should do as the operations grow and have the ability to exceed the current capacity limits that Helping Hospital has put on Pediatrics.  
Include in your response on average how many beds Pediatrics is currently using and how much will this increase based on #6 projected increase in 2019.
Explain why the relevant range is important to know and understand and how it impacts your recommendation. Assume a 365 day year.

Solutions

Expert Solution

Part 1

Peidatrics
Contribution Income statement For the year ended June 30, 2018
Particulars Amount ($) Amount ($)
Revenue 6,200,000.00
Less: Variable Costs
Patient Services 1,860,000.00 1,860,000.00
Contribution Margin 4,340,000.00
Less: Fixed Costs
Bed Capacity costs 2,900,000.00
Personnel costs 600,000.00 3,500,000.00
Profit 840,000.00

Part 2

Total no. patient days for the year ended june 30, 2018 = Number of days in a year * no. bed occupants in a day

Total no. patient days for the year ended june 30, 2018 = 365 * 35 = 12,775.00 patient days

Part 3

Contribution margin per patient day for 2018 = total contribution margin / No. of patient days

Contribution margin per patient day for 2018 = 4,340,000 / 12,775 = $ 339.73

Part 4

For break even, Contribution Margin = Fixed Cost.

Let the no. of patient days be X, therefore we have,

X * $339.73 = 3,500,000.00

From above we get X = 10,302 Patient days

hence we need at least 10,302 patient days for break even.

Part 5

Operating Leverage = Contribution Margin / Net Income

Operating Leverage = 4,340,000 / 840,000 = 5.17


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