1. 24 May 2012
Case 4
Team 2
Melford Hospital Case
Team 2: Rima LeBlanc, Kelly Austin, Alan Bucciero, Steve Gotshall, Kevin O’Neil
Introduction
Melford Hospital offers several specialty practices, including Happy Times Pediatrics, and provides
various materials, space and rental beds. Over the past year, Happy Times Pediatrics has noticed
substantial periods of unused capacity. While at maximum capacity during ninety days out of the year,
the group had to turn away twenty additional patients per day. This proposal addresses how to solve the
short term goal of accommodating the additional demand during those ninety days and offers
suggestions on how to maximize all of the unused beds over the remainder of the year. To accomplish
this, the Cost Volume Profit (CVP) analysis system was used to help determine the breakeven point and
to predict future profit forecasts.
Breakeven Analysis
CVP breakeven analysis was performed to determine the number of patient days required to balance the
total revenue and costs, thus yielding an operating profit of zero. The following logic and resulting
Equation 2 were used to determine this breakeven point.
Breakeven Point: Sales = Fixed Cost + Total Variable Cost + Operating Profit
Equation 1: p *Q = F + (v*Q) + N
Equation 2: Q = (F + N) / (p – v)
Where,
Q = Number of patient days
F = Total Fixed cost
N = Operating profit (= 0)
= Unit variable cost
= Price
The starting point of the analysis was evaluating the total fixed and variable costs for operating with
sixty beds. After determining the total fixed costs of $3,380,000, the above equation was used to solve
for the required number of patient days, which was found to be 16,900 days. Table 1 below shows the
analysis.

2. 24 May 2012
Case 4
Team 2
Table 1. Breakeven analysis for 60 beds
Melford Hospital 60 Beds
Pediatric Bed Analysis Variable Fixed
Patient Days Per PD Bed Capacity Per Bed
Fixed and Variable Costs 20,000 60
Dietary 600,000 30.00
Janitorial 70,000 1,166.67
Laundry 300,000 15.00
Laboratory 450,000 22.50
Pharmacy 350,000 17.50
Repairs and Maintenance 30,000 500.00
General and Administrative 1,300,000 21,666.67
Rent 1,500,000 25,000.00
Billings and Collections 300,000 15.00
Total 2,000,000 100 2,900,000 48,333.33
Labor Costs
Aides 9,000 20 180,000
Nurses 20,000 10 200,000
Supervising Nurses 25,000 4 100,000
Total Labor 480,000
Total Fixed Costs 3,380,000
Fixed Costs
(Revenue per Day - Variable Cost per Day)
3,380,000
Breakeven Analysis
(300 - 100)
16,900 Patient Days
The data in the Table 1 above was used to create the graph in Figure 1 to show a summary pictorial of
the breakeven point. From this graph it is very easy to see how profit and loss change as the number of
beds filled varies from the breakeven point.
Figure 1. Breakeven graph for 60 beds
$12,000,000
20,000
$10,000,000
$8,000,000 Profit
16,900
$6,000,000
$4,000,000
$620,000
$2,000,000 Loss
$0
0 6,000 12,000 18,000 24,000 30,000 36,000
Patient Days
Total Cost Sales

3. 24 May 2012
Case 4
Team 2
Additional Capacity Analysis
While Melford is operating profitably (+$620,000 per year) with the 60 current beds, there was excess
capacity of an additional 20 beds over part of the year that was not able to be accommodated. In order
to increase the number of patients admitted and at the same time increase profitability, a similar CVP
analysis was performed for increased numbers of beds. Table 2 shows a schedule of the costs and
profits based on the number of beds utilized, as beds vary from 60 to 80 total beds.
Table 2. Breakeven schedule for 60, 70 and 80 beds
Melford Hospital 60 Beds 70 Beds 80 Beds
Pediatric Bed Analysis Variable Fixed Variable Fixed Variable Fixed
Patient Days Bed Capacity Patient Days Bed Capacity Patient Days Bed Capacity
Fixed and Variable Costs 20,000 60 20,900 70 21,800 80
Dietary 600,000 627,000 654,000
Janitorial 70,000 81,667 93,333
Laundry 300,000 313,500 327,000
Laboratory 450,000 470,250 490,500
Pharmacy 350,000 365,750 381,500
Repairs and Maintenance 30,000 35,000 40,000
General and Administrative 1,300,000 1,516,667 1,733,333
Rent 1,500,000 1,750,000 2,000,000
Billings and Collections 300,000 313,500 327,000
Total 2,000,000 2,900,000 2,090,000 3,383,333 2,180,000 3,866,667
Labor Costs
Aides 9,000 180,000 180,000 180,000
Nurses 20,000 200,000 200,000 200,000
Supervising Nurses 25,000 100,000 100,000 100,000
Total Labor 480,000 480,000 480,000
Total Fixed Costs 3,380,000 3,863,333 4,346,667
3,380,000 3,863,333 4,346,667
(300 - 100) (300 - 100) (300 - 100)
Breakeven Analysis
16,900 19,317 Patient Days 21,733 Patient Days
Income Statement
Sales 6,000,000 6,270,000 6,540,000
Variable Costs 2,000,000 2,090,000 2,180,000
Gross Profit 4,000,000 4,180,000 4,360,000
Fixed Costs 3,380,000 3,863,333 4,346,667
Net Income 620,000 316,667 13,333
As the Pediatrics’ bed capacity increases, so do the care unit's fixed and variable costs resulting from the
increase in annual patient days.

4. 24 May 2012
Case 4
Team 2
Figure 2 contains a new breakeven graph built from the data in Table 2 for a total of 80 beds. This graph
again shows how profit and loss change, this time in relation to the new breakeven point of 21,733
patient days.
Figure 2. Breakeven graph for 80 beds
$12,000,000
21,800
$10,000,000
Profit
$8,000,000 21,733
$6,000,000
$4,000,000 $13,333
Loss
$2,000,000
$0
0 6,000 12,000 18,000 24,000 30,000 36,000
Patient Days
Total Cost Sales
The 80 total beds would lead to an increase in annual patient days which directly results in an increase in
both fixed and variable costs; however, the amount of labor would remain the same as that required for
60 beds. However, from Table 2 it is clear that keeping patient demand constant, as the number of beds
is increased, the profit decreases linearly at an annual rate of approximately $30,000 per bed.
Recommendations
Several alternative strategies were discussed that can help Melford Hospital's pediatrics become more
profitable as the number of beds is increased, but some ideas were not necessarily in line with all of the
hospital's overall goals. For instance, instead of adding 20 beds, the number of beds could be reduced
from 60 to 54, raising the unit’s percent occupancy from 91% to 99% which would help increase the
hospital's annual net income. Though this would seem like a smart business decision financially as it
maximizes profit at the current demand, it conflicts with one of the hospitals main goals to not turn away
patients. Another suggestion was made to share the additional 20 beds with another section of the
hospital, for instance the psychiatric care unit. This would seem logical to help split costs among the
units, but each entity is separately owned and this could lead to a conflict of interest in patient
scheduling. Another option would be for the hospital's pediatric unit to increase their advertising
budget, but unfortunately the estimated ROI is unknown with the currently available information.
After reviewing all the options discussed the hospital has decided to add an additional 20 beds, and
make them available to an outpatient Pediatric Surgical Associates group on an as-needed availability
basis. This unit was also found to have additional capacity that was not able to be accommodated with
their current facilities. Their surgeons will perform minor pediatric surgeries utilizing up to the 20 beds

5. 24 May 2012
Case 4
Team 2
for pre-operative and post-operative needs. The patients will be brought in for preparation before
surgery into this new 20 bed wing and sent to the hospital operating room for procedure. The patients
will return to the wing to recover post-operatively for an additional short period of time as needed,
before being discharged.
Under this model, it is anticipated that each of the beds Melford Hospital 80 Beds
will be utilized an average of 2-4 times per day by patients Pediatric Bed Analysis Variable Fixed
needing same-day surgery. This will increase the Patient Days Bed Capacity
Fixed and Variable Costs 26,000 80
profitability per bed. The Surgical group will likely not
reach full capacity of all beds each day. Therefore, Dietary 780,000
potential overflow of patients from the pediatric unit Janitorial 93,333
needing to stay longer than a day can be moved into one Laundry 390,000
Laboratory 585,000
of these conveniently located beds. This will address Pharmacy 455,000
the excess demand of pediatric patient beds during Repairs and Maintenance 40,000
times of increased capacity. The pediatric main unit and General and Administrative 1,733,333
the surgical group will coordinate the scheduling of Rent 2,000,000
patients so that all patients’ needs are met and turnover Billings and Collections 390,000
of the beds is maximized. Total 2,600,000 3,866,667
Labor Costs
The cost of the out-patient meals, laundry and Aides 207,000
administrative services, including billing and Nurses 240,000
collections, will be billed separately to the group. Supervising Nurses 100,000
Laboratory and pharmacy services for the 20 beds Total Labor 547,000
occupied by the surgical group will be billed to the Total Fixed Costs 4,413,667
group as well. Janitorial, repairs and maintenance will
be included in the cost of rental per bed. The rental 4,413,667
cost per bed will be increased slightly to increase (300 - 100)
profitability. Labor costs will increase to accommodate Breakeven Analysis
the additional volume during the day and will be billed 22,068 Patient Days
to the group. Conservatively estimating that the
contribution margin for each bed will remain the same Income Statement
as the inpatient margin ($200) and assuming that the Sales 7,800,000
Surgical group will be able to generate an additional Variable Costs 2,600,000
4,200 patient day equivalents, annual profit for the year Gross Profit 5,200,000
ending June 30, 2003 will be $786,333. These numbers Fixed Costs 4,413,667
are reflected in the updated breakeven graph shown Net Income 786,333
below in Figure 3.

6. 24 May 2012
Case 4
Team 2
$12,000,000
26,000
$10,000,000
Profit
$8,000,000 21,733
$6,000,000
$786,333
$4,000,000
Loss
$2,000,000
$0
0 6,000 12,000 18,000 24,000 30,000 36,000
Patient Days
Total Cost Sales
Figure 3. Breakeven graph for 80 beds following recommendation