recent changes in healthcare

With the recent changes in healthcare, hospitals have been under increasing pressure to reduce costs. You have been hired by Best Care Hospital to assist in negotiating the 2016contract with the nurses. Based on the terms of the nursing contract, the hospital may need to change the way they charge the various hospital departments. Your job is to advise the hospital onwhether they insist on a contract that allows the hospital to continue with the existing two-level fixed cost system for charging nursing services to the various hospital departments or toaccept a contract that would cause them toswitch to a variable cost system.You are provided with the following information:In 2015, the nurses received an average annual salary of $45,000. The hospital holds each department accountable for its financial performance, and it records revenues and expense by departments. Consider the expenses of the pediatrics department in 2015.Variable expenses (based on 2015 patient days) are as follows:Variable expenses:Meals      $ 610,000Laundry   $260,000Laboratory $900,000Pharmacy $850,000Maintenance $150,000Other    $530,000Total $ 3,300,000Fixed expenses (based on number of beds) are as follows:Rent    $ 3,000,000General administrative services $2,200,000Janitorial   $200,000Maintenance $150,000Other    $350,000Total    $ 5,900,000Management assigns nurses to department on the basis on annual patient-days as follows:Volume Level in Patient-Days:          # Nurses $10,000-12,000                                 30 12,001-16,000                                   35Total patient-days are the number of patients multiplied by the number of days they are hospitalized. The hospital charges each department for the salaries of the nurses assigned to it.During 2015, the pediatrics department had a capacity of 60 beds, billed each patient an average of $810 per day, and had revenues of $12.15 million.(1) Compute the 2015 volume of activity in patient-days.(2) Computer the 2015 patient – days that would have been necessary for the pediatrics department to recoup all fixed expenses except nursing expenses.(3) Compute the 2015 patient-days that would have been necessary for the pediatrics department to break -even including nurses� salaries as a fixed cost.Do this for both relevant ranges. Provide a written conclusion based on your analysis.(4) Suppose pediatrics must pay $200 per patient -day for nursing services. This plan would replace the two -level, fixed cost system employed in 2015. Compute what the break -even point in patient -days would have been in 2015 under this plan.nursing services to the various hospital departments or to accept a contract that would cause them to switch to a variable cost system.Toassist you in preparing your memo, I have included the following example of a memo to the president of a company regarding an analysis of a multiproduct break-even analysis where the company had a $750,000 sales budget that was met however the mix of products was no what was originally budgeted:Memo to the president:Although the company met its sales budget of $750,000 for the month, the mix of products changed substantially from that budgeted. This is the reason the budgeted net operating income was not met, and the reason the break -even sales were greater than budgeted. Thecompany�s sales mix was planned at 20% White, 52% Fragrant, and 28% Loonzain. The actual sales mix was 40% White, 24% Fragrant, and 36% Loonzain.Asshown by these data, sales shifted away from Fragrant Rice, which provides our greatest contribution per dollar of sales, and shifted toward White Rice, which provides our least contribution per dollar of sales. Although the company met its budgeted level of sales, these sales provided considerably less contribution margin than we had planned, with a resulting decrease in net operating income. Notice from the attached statements that the company�s overall CM ratio was only 52%, as compared to a planned CM ratio of 64%. This also explains why the break-even point was higher than planned. With less average contribution margin per dollar of sales, a greater level of sales had to be achieved to provide sufficient contribution margin to cover fixed costs.

 
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