Cost - Volume - Profit (cvp) Analysis and Strategy

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Managerial Accounting

September 5, 2015

Junlong Zhang

Case 09-3: Cost-Volume-Profit (CVP) Analysis and Strategy

1. What is the strategic role of CVP analysis for the pediatrics unit of Melford Hospital?

Cost-Volume-Profit analysis is used for analyzing how operating decisions and marketing decisions affect short-term operating profit of companies. The analysis puts the information such as variable costs, fixed costs, selling price of each unit, and output level of the target company together, then analyzing the relationship between those elements. In the case of pediatrics unit of Melford Hospital, CVP analysis played an important role by providing information about how patient days change affect its pediatrics’ fixed changes on beds capacity and their net profit. Once the analysis is done, then we could tell whether the pediatrics unit should rent additional 20 more beds from the Melford Hospital or not.

2. Determine the minimum number of patient days required for pediatrics to breakeven for the year ending in June 2014, if the additional 20 beds are not rented.  Patient demand is unknown, but you can assume that revenue per patient day, cost per patient day, cost per bed, and salary rates will remain the same as for the year ended in June 2013.

A.

The year ended June 30 2013

Pediatrics charged each patient: \$300/per day

Capacity of beds: 60 beds

Annual Revenue: \$6000000

2013 Net income: \$620,000

2013 Annual Patient days: 6000000/300=20,000 patient-days

B.

Patient Days                           Bed Capacity

Dietary                      600000

600,000/20,000= \$30/patient day

Janitorial                                                          70000

Laundry                     300000

300,000/20,000=\$15/patient day

Laboratory                   450000

450,000/20,000=\$22.5/patient day

Pharmacy                    350000

350,000/20,000=\$17.5/patient day

Repairs and Maintenance                                             30000

Rent                                                             1500000

Billings and collections         300000

300,000/20,000=\$15/patient day

Total                       \$2000000                             \$2900000

Annual Salaries:

Supervising nurses: 25,000*4=100000

Nurses: 20,000*10=200000

Aides: 9,000*20=180000

Total: \$480,000

C.

Assume Q= X,          F=\$290,000+480,000

Dietary=30X

Laundry=15X

Laboratory=15X

Pharmacy=17.5X

Billings and collections=15X

Variable cost=100X

Pediatrics charged each patient: \$300/ per days

300*Q-V*Q-F=0

Q=16,900 days

16,900 days is the minimum number for pediatrics to break even.

3. Assume that patient demand, revenue, revenue per patient day, cost per patient-day, cost per bed, and salary rates for the year ending in June 30, 2014, remain the same as for the year ended in June, 2013.  Prepare a schedule of increase in revenue and increase in costs for the year ending in June 30, 2014, in order to determine the net increase or decrease in earnings from the additional 20 beds if pediatrics rents this extra capacity from Melford.

A.

Pediatrics charged each patient: \$300/per day

A capacity of beds:            60 beds

Additional beds for 90 days:                    20 beds

Days:                       365 days        90 days

Revenue:                   \$6000000       \$540000

Total: \$6,540,000

2014 Annual Patient days: 6000000/300+90*20=21,800 patient-days

B.

Patient Days           Bed Capacity    Bed Capacity 90 days

(Fixed)          (Fixed)

Dietary                   654000

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