Unit Costs in a Service BusinessMunicipal Hospital relies heavily on cost data to keep its

Unit Costs in a Service Business

Municipal Hospital relies heavily on cost data to keep its pricing structures in line with those of its competitors. The hospital provides a wide range of services, including intensive care, intermediate care, and a neonatal nursery. Joo Young, the hospital’s controller, is concerned about the profits generated by the 30-bed intensive care unit (ICU), so she is reviewing current billing procedures for that unit. The focus of her analysis is the hospital’s billing per ICU patient day. This billing equals the per diem cost of intensive care plus a 40 percent markup to cover other operating costs and generate a profit. ICU patient costs include the following.

Doctors’ care

2 hours per day @ $360 per hour (actual)

Special nursing care

4 hours per day @ $85 per hour (actual)

Regular nursing care

24 hours per day @ $28 per hour (average)

Medications

$237 per day (average)

Medical supplies

$134 per day (average)

Room rental

$350 per day (average)

Food and services

$140 per day (average)

One other significant ICU cost is equipment, which is about $185,000 per room.

Young has determined that the cost per patient day for the equipment is $179.

Wiley Dix, the hospital director, has asked Young to compare the current billing procedure with another that uses industry averages to determine the billing per patient day.

1. Compute the cost per patient per day.

2. Compute the billing per patient day using the hospital’s existing markup rate. (Round answers to whole dollars.)

3. Industry averages for markup rates are as follows.

Equipment

30%

Medications

50%

Doctors’ care

50

Medical supplies

50

Special nursing care

40

Room rental

30

Regular nursing care

50

Food and services

25

Using these rates, compute the billing per patient day. (Round answers to the nearest whole dollars.)

4. Based on your findings in 2 and 3, which billing procedure would you recommend?

Why? Be prepared to discuss your response.

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