5. Omega Hospital’s Open Heart Program has seen a decline in volume due to the n

Question

5. Omega Hospital’s Open Heart Program has seen a decline in volume due to the number of patients having stents inserted at a major competitor’s cardiac catheterization lab. The CEO is quite worried that the volume might fall below break-even. Your data gathering reveals the following: Annual Fixed Costs are $18,000,000; Average Variable Cost per case is $28,000 and Average Charge (Price) per case is $32,540. Over the past 6 months the Open Heart Program has been averaging 80 cases per week. What is your response to the CEO’s concern?

Explanation / Answer

Your data gathering reveals the following:

Annual Fixed Costs are $18,000,000;

Average Variable Cost per case is $28,000 and

Average Charge (Price) per case is $32,540.

Over the past 6 months the Open Heart Program has been averaging 80 cases per week.

What is your response to the CEO’s concern that volume is below break-even.

Break even is where income = output, or where you're earning zero economic profits. Where costs = revenue.

That would be at:

Cost = Revenue

18,000 + (28,000)(80) = Cost = 2, 258, 000

Revenue = $32,540(80) = 2, 603, 200

The CEO has no reason to worry. His revenue is greater than his cost, so he's earning above economic profits and therefore his concern is pointless :)

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