Reference no: EM132517945

Azorean Hospital operates a general hospital but rents space to separately owned entities rendering specialized services such as pediatrics and psychiatry. Azorean 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. Azorean charged the following costs to Pediatrics for the year ended June 30, 2019:

Patient Services Variable  Bed Capacity

Fixed

Dietary                                   $ 600,000

Janitorial                                   $70,000

Laundry                                   300,000

Laboratory                                450,000

Pharmacy                                  350,000

Repairs and Maintenance             30,000

General and Administrative        1,300,000

Rent                                     1,500,000

Billings and Collections                300,000

Total                                   $2,000,000

                                             $2,900,000

In addition to these charges from Azorean Hospital, Pediatrics incurred the following personnel costs:

Annual Salaries*____

Supervising nurses ................................... $100,000

Nurses .......................................................... 200,000

Assistants..................................................... 180,000

Total ............................................................. $480,000

*These salaries are fixed within the ranges of annual patient-days considered in this problem.

• During the year ended June 30, 2019, Pediatrics charged each patient $300 per day, had a capacity of 60 beds, and had revenues of $6,000,000 for 365 days. Pediatrics operated at 100 percent capacity on 90 days during this period. It is estimated that during these 90 days, the demand exceeded 80 beds. Azorean has 20 additional beds available for rent for the year ending June 30, 2020. This additional rental would proportionately increase Pediatrics' annual fixed charges based on bed capacity.

Required:

Question a) Calculate the minimum number of patient-days required for Pediatrics to break even for the year ending June 30, 2020, if the additional beds are not rented. Patient demand is unknown, but assumes that revenue per patient-day, cost per patient-day, cost per bed, and salary rates for the year ending June 30, 2020, remain the same as for the year ended June 30, 2019.

Question b) Assume Pediatrics rents the extra 20-bed capacity from Azorean. Determine the net increase or decrease in earnings by preparing a schedule of increases in revenues and costs for the year ending June 30, 2020. Assume that patient demand, revenue per patient-day, cost per patient-day, cost per bed, and salary rates remain the same as for the year ended June 30, 2019.