Managerial Accounting: 2-60 Gotham City Hospital is unionized. In 20X6

Managerial Accounting

2-60 Hospital Costs
Gotham City Hospital is unionized. In 20X6, nurses received an average annual salary of $45,000. The hospital administrator is considering changes in the contract with nurses for 20X7. In turn, the hospital may also change the way it charges nursing costs to each department. The hospital holds each department accountable for its financial performance, and it allocates revenues and expenses to departments.

Consider the expenses of the obstetrics department in 20X6. Variable expenses (based on 20X6 patient-days) are:

Meals 610,000

Laundry 260,000

Laboratory 900,000

Pharmacy 850,000

Maintenance 150,000

Other 530,000

Total 3,300,000

Fixed expenses (based on number of beds) are

Rent 3,000,000

General administrative services 2,200,000

Janitorial 200,000

Maintenance 150,000

Other 350,000

Total 5,900,000

Management assigns nurses to departments on the basis of annual patient-days as follows:

Volume Level in Patient-Days Number of Nurses

10,000-12,000 30

12,001-16,000 35

Total 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 20X6, the obstetrics 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 20X6 volume of activity in patient-days.

2. Compute the 20X6 patient-days that would have been necessary for the obstetrics department to recoup all fixed expenses except nursing expenses.

3. Compute the 20X6 patient-days that would have been necessary for the obstetrics department to break even including nurses' salaries as a fixed cost.

4. Suppose obstetrics must pay $200 per patient-day for nursing services. This plan would replace the two-level, fixed-cost system employed in 20X6. Compute what the break-even point in patient-days would have been in 20X6 under this plan.
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