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Supporting Info:

Helping Hospital operates a general hospital but rents space to separately

owned entities rendering specialized services such as pediatrics and psychiatry.  

Helping 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.  

Helping Hospital charged the following costs to Pediatrics for the year ended June 30, 2019.    

Patient Services Bed Capacity (Variable cost) (Fixed Cost)

Dietary $560,000  

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 $1,820,000 $2,900,000


In addition to these charges from Helping Hospital, Pediatrics incurred the following personnel costs.

Title Annual Salaries—these salaries are fixed

Supervising nurses $100,000

Nurses 420,000

Assistants 180,000

Total $700,000


During the year ended June 30, 2019, Pediatrics charged the following and had the following relevant days:

$500 daily charge to patient for services

$6,500,000 Total Revenues

36 Relevant Range of daily beds


Question:

1. Prepare a contribution income statement for Pediatrics for the year ended June 30, 2019. 

2. Calculate the number of patient-days that Pediatrics generated in revenue for the year ended June 30, 2019.  

3. Compute the contribution margin per patient days generated for the year ended June 30, 2019.

4. Calculate the minimum number of patient-days required for Pediatrics to break even for the upcoming year June 30, 2020.  Assume that revenue per patient-day, cost per patient-day,  cost per bed and salary rates for this upcoming year June 30, 2020, remain the same as for the year ended June 30, 2019.  

5. Calculate the operating leverage ratio.

6. If demand for patient days are projected to increase from the 2019 current patient demand in 2020: Calculate the increase in income using the operating leverage. 7. Prepare a contribution income statement showing the projected 2020 revenue and costs if the demand for patient days increases in 2020 to the projected increase stated in #6.

8. Using the profit for end of year June 30, 2019 and June 30, 2020, 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 daily and how much will this increase based on #6 projected increase in 2020. Explain why the relevant range is important to know and understand and how it impacts your recommendation. Assume a 365 day year.

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