Cost - Volume - Profit (cvp) Analysis and Strategy
Essay by Jimmy Zhang • April 17, 2016 • Case Study • 2,325 Words (10 Pages) • 1,812 Views
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
General and administrative 1300000
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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