1. The assumptions required to determine the breakeven volume for the dialysis unit are as follows: (a) each patient receives three treatments per week for a total of 156 treatments per year; (b) The overhead costs allocated by the hospital to the dialysis unit are too high, and that the correct allocation level is 148,935 (refer to 2., below); and (c) Variable costs for the dialysis unit are those for medical supplies and purchased lab services. The breakeven point in volume under these assumptions is 31.3 patients (refer to the exhibit on the following page).
2. The fair share of the overhead for the dialysis unit based on current activity level was determined on the basis of (a) the proportion of the dialysis unit's direct expenses as a proportion of the total direct expenses for the hospital, times (b) the total apportionable expenses for the hospital. Thus, the fair share of the overhead for the dialysis unit is $148,935 (refer to the exhibit on the following page).
3. Should the dialysis unit lose 50 percent of its case load as a consequence of the changing Medicare practices, the probability is that the dialysis unit would not be able to cover its fixed expenses on the basis of current financial assumptions. In part, however, this problem could be overcome by reducing allocated costs to the dialysis unit based on its lower activity level. In this case, the breakeven volume would drop to a level that could be met even with the reduced expectations. At the current level of operations, the dialysis unit is generating $34.50 in excess of total expenses for each dialysis treatment, or a total of $197,282 per year. Even at one-half this level, retaining the dialysis unit would be worthwhile because the hospital could continue to recoup in investment in its dialysis equipment.
4. Dr. Newell should press the hospital to retain the dialysis unit.
5. Dr. Lawrence should implement a change in overhead cost
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