University Hospital has two separate units that are part of thehospital but are two separate facilities. The first is the mainhospital that performs emergency room functions, surgeries, andrecovery. Separate from the main hospital is an outpatient surgerycenter. In an effort to control costs, some of the patients thatneed minor surgeries are routed to the outpatient surgery center.The outpatient surgery center treats patients in three activitycenters: (1) Surgery, (2) Phase I recovery, where patients recoverwhile the patients are still asleep, (3) Phase II recovery, wherepatients recover while they are awake. Phase II recovery ends whenthe patients go home. Daily capacities and production levels are asfollows.

	surgery	phase i recovery	phase ii recovery
Daily Capacity (surgeries)	40	30	60
Daily Production (surgeries)	30	30	30

The hospital receives an average of $1,000 per surgery. (Thesurgeon’s fee and the anesthesiologist’s fee are billedseparately.) The variable cost per surgery is $300. There issufficient demand for surgeries that the hospital could perform 60surgeries per day. Surgeries not performed by the outpatientsurgery center are sent to the main hospital’s regular surgeryrooms. The variable cost per surgery for regular surgery in themain hospital is $700, while the hospital still receives $1,000 persurgery. The hospital management is considering the followingalternatives:

1. Continue performing 30 surgeries per day at the outpatientsurgery center and send the other 30 patients per day to the mainhospital’s regular surgery rooms.

2. Remodel the outpatient recovery rooms so that some of thePhase II space could be used for Phase I recovery. This would cost$2,000 per day and enable the outpatient surgery center to perform40 surgeries per day. They would then send 20 patients to thehospital’s regular operating rooms.

3. Expand the facilities of the outpatient surgery center at adifferential cost of $15,000 per day so that it could perform 60surgeries per day, and service 60 patients per day in Phase Irecovery. That would mean the hospital would service 60 patientsper day in Phase II recovery.

Which choice should the hospital make and why? (pleasedemonstrate in an income statement)