Mack DasMesser, CEO of Lloydian Outpatient Surgical

Production Choice under a Capacity ConstraintMack DasMesser, CEO of Lloydian Outpatient Surgical, is reviewing the financial results from the most recent fiscal year, trying to decide the profit-maximizing way to use the limited capacity of Lloydian’s surgical facilities. Lloydian currently performs three surgical procedures. DasMesser is wondering whether he should change the number of procedures performed, or even drop one procedure altogether. Results from 2009 were:2009 PROFIT STATEMENTProc IProc IIProc IIITotalContribution margin7641,6259243,313Less: procedure-specific fixed costs131483311925Contribution toward corporate fixed costs6331,1426132,388Less: allocation of corporate fixed costs6588685522,078Pre-tax profit(25)27461310Pre-tax profit per procedure(0.78)2.252.18The accounting department had provided additional information:2009 CAPACITY DATAProc IProc IIProc IIITotalNumber of procedures performed3212228Operating room hours per procedure325Total operating room hours used96244140480Maximum demand for procedure4015036The procedures required different lengths of time in the operating rooms. Lloydian’s annual capacity of operating room hours is 480. This capacity was completely used in 2009.Based on this information, Mack decided to:Drop Proc I.Increase the number of Proc IIs to 150.Increase the number of Proc IIIs to 36.His reasoning was as follows. Lloydian was losing 0.78 for every Proc I performed. It was not a difficult decision to discontinue performing this service. The only question was how to allocate Lloydian’s 480 operating room hours to the other two Procs. This, too, was an easy decision because servicing the maximum demand for Proc II and Proc III required exactly 480 operating room hours, Lloydian’s maximum capacity: 150 x 2 + 36 x 5 = 480.Assuming no projected changes in fixed cost amounts, DasMesser estimated the impact on profits to be:2009 pre-tax profit310+ elimination of loss from Proc I25+ profit from extra Proc IIs (150 – 122) x 2.2563+ profit from extra Proc IIIs (36 – 28) x 2.1817——————————————————-Projected 2010 pre-tax profit415Questions (Requirement):a. What other considerations might factor into your decision regarding the allocation of the scarce resource of operating room hours?b. In what sense is breakeven analysis relevant here?c. What is surprising about your final recommendation?d. What actions might you consider to further improve the financial success of Lloydian?e. Summarize the sequence of logic that you would apply in a future similar situation.