Question

University Hospital has an outpatient surgery center that treats patients in three activity centers: (1) Surgery, which does surgery on the patients, (2) Phase I recovery, where patients recover from surgery while still asleep, and (3) Phase II surgery, where the   patients continue recovering after they awake. At the end of Phase II surgery, patients go home. Daily capacities and production levels are as follows:

                                    Surgery                        Phase I Recovery        Phase II Recovery

Daily capacity             40 surgeries                 30 surgeries                 60 surgeries

                        The hospital receives an average of $1,200 per surgery. (The surgeon’s fee and anesthesiologist fee is billed separately.) The variable cost per surgery is $400. There is sufficient demand for    surgeries that the hospital could perform 60 per day. Surgeries not    performed by the outpatient surgery center are sent to the hospital’s regular surgery rooms in the hospital. The variable cost per surgery for the regular surgery rooms is $800, while the hospital still receives $1,200 per surgery.

                        Here are some alternatives that management is considering.

1. Continue performing 30 surgeries per day in the outpatient surgery center and send 30 patients to the hospital’s regular surgery rooms for the other 30 patients.
2. Rebuild the recovery rooms so that some of the Phase II space could be used for Phase I recovery. This would cost $2,000 per day and would enable the outpatient surgery center to perform 40 surgeries per day and send 20 patients to the hospital’s regular operating rooms.

                        Required:

Prepare an income statement for each of the two alternatives and indicate which alternative is the better one.

Answer 1

Computation of Margin under Alternative A -

		outpatient surgery	regular surgery	Total
	Number of surgeries per day	30	30	60
	Income from operation @ 1200 per surgery	36000	36000	72000
	Total Revenue	36000	36000	72000
less	Expenses:
	variable cost per surgery 400 for outpatient surgery & 800 for regular	12000	24000	36000
	Margin			36000

Computation of Margin under Alternative b

	Number of surgeries per day	40	20	60
		outpatient surgery	regular surgery	Total
	Number of surgeries per day	40	20	60
	Income from operation @ 1200 per surgery	48000	24000	72000
	Total Revenue	48000	24000	72000
less	Expenses:
	variable cost per surgery 400 for outpatient surgery & 800 for regular	16000	16000	32000
	Rebuild cost per day			2000
	Total Expense			34000
	Margin			38000

Indication - Alternative 2 seems better one in terms of Margin as It has better margin than alternative 1.

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