Question

Atlantic City Hospital owns and operates a local hospital. It also leases unused space, including beds to other businesses that offer related services such as Physical Therapy and Long-Term Care. Atlantic City charges each company for common services provided such as laboratory and xray services. The hospital charged the following costs to Long Term Care for the year ended June 30,2018:

	Variable Expenses	Fixed Expense
Food Service	$560,000.00
Xray Service		71000
Laundry	$250,000.00
Lab costs	$430,000.00
Pharmacy Services	$310,000.00			Variable Expenses are charged
Repairs and Maintenance		33000		for patient days
General and admistrative		1300000
Rent		1540000		Fixed expenses are charged
Bill and collections	$250,000.00			based on bed capacity leased
Total	$1,800,000.00	2944000

During the year ended June 30, 2018, Long Term Care charged each patient an average of $500 per day, had availability of 80 beds and had revenue of $6 million for 365 days. In addition, Long Term Care directly employed personnel with the following annual salary costs per employee: supervising nurses $26625; nurses $20,200 and cna's $8500.The hospital has the following minimum departmental personnel requirements, based on total annual patient days:

Annual Patient Days	Nurse aid (CNA)	Nurses	Supervisor Nurses
Up to 20,000	20	10	4
20,001 to 25,000	25	14	5
25,001 to 30,000	31	16	5

Long Term care always employs only the minimum number of supervising nurses and nurses but operates with 5 additional aides than the minimum required by the hospital. Salaries of supervising nurses, nurses and CNA's are fixed within ranges of annual patient days.

Long Term care operated at 100% capacity on 80 days during the year ended June 30, 2018. The hospital estimates that on the 80 days, Long Term care could have filled another 20 beds above capacity. The hospital has an additional 20 beds available for lease for the year ending June 30, 2019. The additional leased beds would increase Long Term care's fixed charges based on bed capacity. (ignore income taxes).

1. Calculate the break-even patient days for Long Term care for the year ending June 30, 2019, assuming 20 extra beds are not leased. Assume all other data and rates from June 30, 2018 remain the same.

2. Determine the net increase or decrease in Long term care's earnings for the year ending June 30, 2019 from the additional beds if Long Term care leased this extra capacity from Atlantic City Hospital. Create a schedule of Long Term care's increase in revenue and increase in costs for the year. The number of additional patient days is based on using the additional beds when at max capacity. Assume patient demand, revenue, variable and fixed rates from June 30,2018 remain the same.

3. Should Long term care lease the additional 20 beds for the year ending June 30, 2019?

4. If max capacity were to increase and the additional beds were needed for more than 80 days at what number of days would they willing to lease the additional 20 beds? Calculate the break-even (patient days) for Long Term care to lease the additional beds. Only consider the revenue and expenses calculated in question #2.

Answer 1

1)
Atlantic City Hospital
COMPUTATION OF BREAK-EVEN POINT
INPATIENT-DAYS: LONG TERM CARE
FOR THE YEAR ENDED JUNE 30, 2019
Total fixed costs:
Medical center charges	$                          2,944,000.00
Supervising nurses ($26625 x 4)	$                             106,500.00
Nurses (20,200 x 10)	$                             202,000.00
Aids (8500 x 20)	$                             170,000.00
Total fixed costs	$                          3,422,500.00
Contribution margin per patient-day
Revenue per patient-day	$500.00
Variable cost per patient-day
($6,000,000 ÷ $500 = 12,000 patient-days)
($1,800,000 ÷ 12,000 patient-days)	$150.00
Contribution margin per patient-day	$350.00
Break-even point inpatient-day = Fixed Cost/ Contribution Margin per Patient day	9778.57	Patient Days
2)
Atlantic City Hospital
COMPUTATION OF LOSS FROM RENTAL OF ADDITIONAL 20 BEDS: LONG TERM CARE
FOR THE YEAR ENDED JUNE 30, 2019
Increase in revenue ((20 additional beds x 90 days x $500 charge per day)		$           900,000.00
Increase in expenses:
Variable charges by medical center(20 additional beds x 90 days x $150 per day)	$                             270,000.00
Fixed Cost = $3,422,500/80 beds ) x 20 beds	$                             855,625.00
Salaries (12,000 patient-days before additional 20 beds + 20 additional beds x 90 days = 13,800, which does not exceed 22,000 patient-days; therefore, no additional personnel are required)	0
Total increase in expenses		$        1,125,625.00
Net change in earnings from lease of additional 20 beds		$          (225,625.00)

4)
Contribution margin per patient-day
Revenue per patient-day	$500.00
Variable cost per patient-day
($6,000,000 ÷ $500 = 12,000 patient-days)
($1,800,000 ÷ 12,000 patient-days)	$150.00
Contribution margin per patient-day	$350.00
Fixed cost = 855625 +  3,422,500	$                          4,278,125.00
Break-even point inpatient-day = Fixed Cost/ Contribution Margin per Patient day	12,223.21	Patient Days