Note – If you find undertaking These are shortanswer questions and not essay questions. While dot points can be used where appropriate
the calculations difficult do not stress, but seek help!
Part 1. Cost Behaviours – break-even analysis
The Sturt Private Hospital (SPH) charges an average patient fee of $1,500 and the hospital currently provides
services to 900 patients per year. The average costs per patient are:
Direct labour $450
Drugs and other consumables: $250
Other direct costs $350
Hospital overheads:
Insurance $32,000
Rent $42,000
Depreciation $31,000
Administration $155,000
SPH is tendering for a government contract to provide health care services to an additional 400 patients. The
current occupancy rate is such that hospital overheads will stay the same regardless of whether SPH is
successful with its tender. It is expected that the additional patients will cost the same to treat as the currently
treated patients.
1. What is SPH’s current contribution margin?
2. What is SPH’s current breakeven point?
3. If SPH is successful with its tender what extra costs will be involved? Prepare a schedule showing
the extra costs involved in providing services to these patients.
4. What is the minimum tender bid for SPH to breakeven on the tender?
5. If SPH bid $400,000 for this government contract, what impact would the tender have on the
hospital’s profitability?
6. In considering the tender for this government contact, what other factors might the SPH take into
account? Give reasons for your answer.
It is important that you can not only perform the calculations, but that you are able to present the information
too. Consequently, this part of the assignment should be submitted as a recorded video. The video can be
recorded with a smartphone, iPad, laptop etc. and the file submitted via FLO.
You have 5 minutes to present your results to the hospital’s CEO. As the CEO is travelling overseas, you’ve
been asked to create a short video report. The aim of the recording is to present your findings and
conclusions to the CEO in 5 minutes.
You should appear in the video and you may also use whiteboard (or paper stuck on a door, etc.), your
computer screen etc. to support your presentation.HACM9102 Financial Management and Economics in Health Care 17
Some examples of students presenting work can be found at:


Note – these examples come from Mathematics students. You are not expected to show the calculation of
your answers as part of the recording! You are presenting the findings of your work to the CEO (so you will
have already done the calculations) and the key is to explain them – in 5 minutes!
You must still submit your calculations, either in Excel or Word format, so that your answers can be checked if
you make a mistake in your answer. Please format the work appropriately so that it can be reviewed easily
(i.e., show the question numbers).
This represents half of the assignment. As it is not a written piece of work, the assessment will be made upon
the following basis:
• Presentation and communication of your findings (20%)
• Judgment on determining how long to spend communicating different parts of your analysis (hint – some
questions will require more explanation as the findings will be of greater importance in relation to
decision-making) (10%)
• Demonstrated theoretical understanding (30%)
• Correctly presented analysis/calculations (40%)
Note – the assessment is not about your movie making skills, but please try to keep your phone or other
recording device steady! Videos that exceed the 5-minute threshold will be penalised. Please upload video as
MP4 files only.
Part 2 – Capital Investment Decisions
Bedford Park Hospital (BPH) is considering the purchase of a new item of medical equipment. The decision
has come down to a choice between Machine A and Machine B.
Machine A has a cost of $105,000 and has an expected economic life of five years, after which it has a scrap
value of $25,000. The after-tax profits or (losses) for the next five years are ($15,000), $32,000, $38,500,
$42,000 and $47,500. Note: ($15,000) is the same as to -$15,000.
Machine B has an initial cash outlay of $105,000 with an economic life of five years and no scrap value. The
annual after-tax profits are expected to be $32,500 for year 1 and 2 and then $28,000 for the each of the
remaining 3 years.
BPH requires a return on average assets employed of 12% and has a cost of capital of 10%. It also prefers
projects that pay for themselves within three years. Depreciation is always calculated on a straight-line basis.
1. Evaluate the relative merits of these machines using:
a) The accounting rate of return (ARR)
b) The payback period (PP)
c) Net present value (NPV)
d) Internal rate of return (IRR)
2. Which machine is the better investment? Explain your answer and your preferred method of
evaluating the investment merits of these machines.
3. What are opportunity costs and how are they important in capital investment decisions?HACM9102 Financial Management and Economics in Health Care 18
4. Why are cash flows rather than profit flows used in the IRR, NPV and PP methods of investment
appraisal?