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You have been hired as a consultant for Southwest Hospital to evaluate some of their business operations. The hospital board has provided the following information to help you in your evaluation:

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The problem

You have been hired as a consultant for Southwest Hospital to evaluate some of their business operations.  The hospital board has provided the following information to help you in your evaluation:

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.  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 goodwill, 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 and $40 for each pair of glasses.

The hospital receives a payment of $2,000 for each eye operation performed.  The hospital currently averages 70 eye operations per month.

One of the nurses informed the board that she has recently learned about a machine that would reduce the per-patient amount of medical supplies needed for each operation by $100.   The machine can be leased annually for $100,000.

An advertising agency has proposed to the hospital board that the board should 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.

problems

  • Create both cost and revenue functions for running the eye surgery operating room as it currently operates (i.e. without considering the new machine or the advertising) by identifying revenue per case and annual fixed and variable costs.
  • Based on current operations, determine how many eye operations the hospital must perform each year in order to break even. How does this compare to current operations at Southwest Hospital?
 
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