Chapter 1, Problem 4EAGP1

I. Hospital Administration

Southwest Hospital has an operating room used only for laser eye surgery. The annual cost of rent, heat and electricity for the operating room and its equipment is $1.08 million, and the annual salaries of the people who staff this room total $1.6 million.

The cost for each surgery is $2395, which includes all medical supplies and drugs and a complimentary bouquet of flowers for each patient. In addition, one-quarter of the patients require dark glasses that the hospital provides at no additional charge but cost $20 per pair. The hospital receives a payment of 56000 for each eye operation performed.

An advertising agency has proposed to the hospitals president that she spend $20.000 per month on television and radio advertising to persuade people that Southwest Hospital is the best place to have laser eye surgery performed. Advertising account executives estimate that such publicity would increase business by 40 operations per month. If they are correct and if this increase is not big enough to affect fixed costs, what impact would this advertising have on the hospitals profits?