Southwest Hospital has an operating room used only for eye surgery. The annual cost of rent, heat, and electricity for the operating room and its equipment is $360,000, and the annual salaries of the people who staff this room total $540,000. Each surgery performed requires the use of $760 worth of medical supplies and drugs. To promote good will, every patient receives a bouquet of flowers the day after surgery. In addition, one-quarter of the patients require dark glasses, which the hospital provides free of charge. It costs the hospital $30 for each bouquet of flowers and $40 for each pair of glasses. The hospital receives a payment of $2000 for each eye operation performed. 1. Identify the revenue per case and the annual fixed and variable costs for running the operating room. 2. How many eye operations must the hospital perform each year in order to break even?
Southwest Hospital has an operating room used only for eye surgery. The annual cost of rent, heat, and electricity for the operating room and its equipment is $360,000, and the annual salaries of the people who staff this room total $540,000.
Each surgery performed requires the use of $760 worth of medical supplies and drugs. To promote good will, every patient receives a bouquet of flowers the day after surgery. In addition, one-quarter of the patients require dark glasses, which the hospital provides free of charge. It costs the hospital $30 for each bouquet of flowers and $40 for each pair of glasses.
The hospital receives a payment of $2000 for each eye operation performed.
1. Identify the revenue per case and the annual fixed and variable costs for running the operating room.
2. How many eye operations must the hospital perform each year in order to break even?
3. Southwest Hospital currently averages about 70 eye operations per month. One of the nurses has just learned about a machine that would reduce by $100 per patient the amount of medical supplies needed. It can be leased for $100,000 annually. Keeping in mind the financial cost and benefits, advise the hospital on whether it should lease this machine.
4. An advertising agency has proposed to the hospital’s president that she spend $20,000 per month on television and radio advertising to persuade people that Southwest Hospital is the best place to have any eye surgery performed. Advertising account executives estimate that such publicity would increase business by 40 operations per month. If they are correct and if this increase is not big enough to affect fixed costs, what impact would this advertising have on the hospital’s profits?
5. In case the advertising agency is being overly optimistic, how many extra operations per month are needed to cover the cost of the proposed ads?
6. If the ad campaign is approved and subsequently meets its projections, should the hospital review its decision about the machine discussed in Question 3?
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