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5.4 General Hospital

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5.4 – General Hospital, a not-for-profit acute care facility, has the following cost structure for its inpatient services:
Fixed Costs $10,000,000
Variable cost per inpatient day $200
Charge (revenue) per inpatient day $1,000
The hospital expects to have a patient load of 15,000 inpatient days next year.

a. Construct the hospital’s base case projected P&L statement.

Total revenues ($1,000 x 15,000) $15,000,000
Total variable costs ($200 x 15,000) $ 3,000,000
Total contribution margin ($800 x 15,000) $12,000,000
Fixed costs $10,000,000
Profit $2,000,000

b. What is the hospital’s breakeven point?

Contribution Margin x Volume = Fixed Costs
$800 x V = $10,000,000
V = 10,000,000/800
V = 12,500 visits to break even

c. What volume is required to provide a profit of $1,000,000? A profit of $500,000?
To obtain a profit of $1,000,000, the total contribution margin should be $1,000,000 greater than the fixed costs ($10,000,000), for a value of $11,000,000. This amount must also equal the contribution margin multiplied volume, $800 x Volume = $11,000,000. The volume = $11,000,000/$800 = 13,750 visits

Similarly, to obtain a profit of $500,000, the total contribution margin should be $500,000 greater than the fixed costs ($10,000,000), for a value of $10,500,000. This amount must also equal the contribution margin multiplied volume, $800 x Volume = $10,500,000. The volume = $10,500,000/$800 = 13,125

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