A Case Method Approach to Teaching Cost-Volume-Profit Analysis of Columbus

Hospital

INTRODUCTION

Columbus Hospital aims to provide advanced high-quality psychiatric care by understanding the
patient's distress as well as their relatives or carers. Children, adolescents, adults, elderly men
and women with stress-related, depression, anxiety, sleep, memory, bipolar, schizophrenia and
alcohol deaddiction are given utmost care and treatment on par with any world-class
healthcare facility.

The case study is related to Cost-Volume-Profit Analysis of Columbus Hospital. As Hospital cost
is different from others sectors. It’s requires examining total costs, along with fixed and variable
costs. CVP analysis illuminates how changes in assumptions about cost behavior and the
relevant range in which those assumptions are valid affect the relationships among revenues,
variable costs and fixed costs at various production levels.

We present an alternative, more comprehensive teaching approach, for Cost-Volume-Profit

(CVP) analysis from the commonly used approach which simply teaches students how to use a
series of equations to solve various questions related to CVP analysis, in which unit selling price,
total fixed costs, and unit variable costs are assumed to remain constant. We use a multi-
disciplinary approach in the context of a realistic case-analysis. I believe this approach offers
useful insights and provides a useful learning tool for students pursuing a Master’s of
Professional Finance (MPF) Degree. The case at hand requires students to make assumptions
about costs in a dynamic and interactive way, and research a variety of cost behavior issues of
Hospital and how CVP analysis can be an extremely useful tool for determining the potential
success of the Hospital.

Strategies

7 Strategies to Help Hospitals Break Even

1. Know your Medicare data.

2. Benchmark productivity metrics.
3. Reduce clinical variation through active partnership with physicians.
4. Look at "big bucket" operations savings.
5. Explore bundled payments.
6. Improve operating room and emergency room operations
7. Consider affiliations and partnerships with other hospitals.
DEVELOPMENT OF THE CASE

The case is developing in consideration of Hospital Cost. Columbus Hospital has separates
entities for specialized Areas such as pediatrics, maternity, psychiatric, etc, and charges
cost to each entities. Firstly we have to fix the fixed cost for each entities and secondly
variable cost for each activity. Also charge them for common services such as, meals,
laundry, billings and collections etc

DATA ANALYSIS

• Average patients charge = $ 65/ day

• Has capacity of 60 beds
• Revenue in 19x3= $11,38,800 for 365 days
• Operated at 100% capacity during 19x3

Administrators estimate that on those 90 days, they can fill another 20 beds above
capacity (income taxes ignored

Expenses charged by the Hospital to the pediatrics department for the year ended
June30,19X3, were as follows:

Particulars Basis of Allocation

Patient days Bed capacity
Dietary $42,952
Janitorial $12,800
Laundry 28,000
Laboratory, other than direct 47,800
charges to patients
Pharmacy 33,800
Repairs and maintenance 5,200 7,140
General Administration Service 13,1760
Rent 275,320
Billing and collection 40,000
Bad debt expenses 47,000
Others 18,048
$262,800 $4,53,000
Minimum department personnel requirements from Columbus Hospital

Annual patient Days Aides Nurses Supervising Nurses

10000-14000 21 11 4
14001-17000 22 12 4
17001-23725 22 13 4
23726-25550 25 14 5
25551-27375 26 14 5
27376-29200 29 16 6
Salary costs: Supervising Nurses $18,000; Nurses $13,000; Aides $5000 ,
Total Salary Expenses for the year ended19X3 for Supervising Nurses $110,000; Nurses
$169,000; Aides $72,000

Additional Information:
The pediatrics department operated at 100 percent capacity during 111 days for the past
year.

Requirements:

1. Minimum number of patient days required for Pediatrics to Break-Even for the year
ending June 30,19x4 if the additional 20 beds are not rented. Assume that revenue
per patient day, cost per patient day, cost per bed and salary rates will remain the
same as 19x3

2. Assume patient demand, revenue per patient per day, cost per patient day, cost per
bed and salary rates will remain the same as 19x3 for the year 19X4 , should the
pediatrics department rent the additional 20 bed? Show the annual gain or loss from
the additional beds
ANSWERS TO THE CASE

BREAK EVEN POINTS

COLUMBUS HOSPITAL
Break-Even Point in Pat i e nt Days: Pediatrics for t h e Year Ended June 3 0 , 1 9 x 3

To t a l F i xe d C o st s :
M e d i c a l C e n t e r C h a r ge s 453,000
Supervising Nurses $72,000
Nurses $1,69,000
Aids $1,10,000
Total Fixed cost $804,000
Variable cost:
Per unit Variable cost = 262800/17520 =15
Contribution margin per patient:
Revenue per patient day $65
Variable Cost per patient day $ 15
Contribution Margin per patient day $40
Breakeven point patient day:
Total Fixed cost $804,000/
Contribution Margin per patient day $40
Breakeven point per patient day 20,100
Change in earnings of Additional 20 Beds

Columbus Hospital

Loss from Rental of Additional 20 Beds: Pediatrics

For the year Ended June 30, 19x3

Increase in Revenue

Additional beds 20
Day 90
Revenue Per Patient day $65
Increase in Revenue (20 x 90x 65) $1,17,000

Increase in Expense

Variable charge by medical center

Additional beds 20
Day 90
Charges Per Patient day $15

Increase in Expense (20 x 90x 15) $27,000

Fixed charge by medical center:

Medical center charge $4,53,000

Bed capacity 60
Additional Bed 20
Fixed charge by medical center $1,51,000

Patient days before additional 20 beds $6185

Additional bed 20
Days 90
Patient days after additional 20 beds $21900 (20100+(20x90))

Total increase in expenses $ 1,78,000

Net Change in earning from rental of additional 20 beds $ ( 61,000)

RECOMMENDATION

If Columbus Hospital is a nonprofit organization (NPO), then the decrease in profit would not
be an issue, it is still consider adding the extra beds to fulfill patients demand.

Columbus Hospital think for profit orientation, then adding the extra beds would not be
necessary. By adding beds means higher costs, less earnings. Alternatively, the Pediatrics Care
could consider increasing the price

CONCLUSION

The additional cost for the 20 extra beds is higher than its contribution margin . Increasing the
beds availability equal to increasing the patient days . In case of adding 20 extra beds will
decrease the net earnings. The greater number of patient days also increases the variable costs.

REFERENCES