1 answer

Problem 1 Assume that a radiologist group practice has the following cost structure: Fixed costs $500,000...

Question:

Problem 1

Assume that a radiologist group practice has the following cost structure:

Fixed costs

$500,000

Variable cost per procedure

$25

Charge (price) per procedure

$100

Furthermore, assume that the group expects to perform 7,500 procedures in the coming year.

Part A

a. Construct the group’s base case projected P&L statement. (See exhibit 5-5).

P & L Statement

Revenue                      750,000 (100 x 7500)

Variable Costs               -187,500 (25 x 2500)

Contribution                562,500

Fixed Costs                   -500,000

Net income/profit        62,500

b. What is the group’s contribution margin?

Contribution margin = 100 – 25 = 75 per product and 562,500 in total for 7500 products

c. What is the group’s breakeven point in volume?

Breakeven point is 500,000/75 = 6,666.67 = 6,667

d. What volume is required to provide a pretax profit of $100,000?

Part B

a. Complete the following table

Volume

Revenue

Fixed Costs

Variable Costs

Total Costs

Average Cost

0

500

1,000

1,500

2,000

2,500

3,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

b. Describe the relationship between volume and average cost in this particular cost structure. Please explain.

c. Sketch out a CVP analysis graph depicting the base case situation. (Hint: use Excel to produce the sketch. When done, copy/paste the sketch below).

Problem 2

You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows”

Revenues (10,000 visits)

$400,000

Wages and benefits

220,000

Rent

5,000

Depreciation

30,000

Utilities

2,500

Medical supplies

50,000

Administrative supplies

10,000

Assume that all costs are fixed, except medical supplies and administrative supplies, which are variable. Furthermore, assume that the clinic must pay taxes at 30 percent rate.

a. Construct the clinic’s projected P&L statement.

EXPENSES                     AMOUNT          INCOME            AMOUNT

Wages and benefits      220,000           revenue           400,000

Rent                             5,000              

Depreciation                30,000

Utilities                        2,500

Medical Supplies          50,000

Administrative Supplies 10,000

Profit                           82,500

TOTAL                           400,000                                   400,000

Profit = 82,500

Tax       -24,750

            $57,750

b. What number of visits is required for break-even? (Hint: At breakeven, there is zero taxable income and hence zero taxes).

Break even point = fixed cost/cont pu

                        = 257,500/34

                        = 7573.52

                        = 7574 visits

c. What number of visits is required to provide you with an after-tax profit of $100,000?

Profit before tax = (100,000/70) x 100

                        = 142,857

Number of visits required = fixed cost + profit before tax/cont pu

                                    = 257,500 + 142,857/34

                                    = 11,775 visits

Problem 3

Burleson Clinic has fixed costs of $2,000,000 and an average variable cost rate of $15 per visit. Its sole payer, an HMO, has proposed an annual capitation payment of $150 per each of its 20,000 members. Past experience indicates the population served will average two visits per year.

a. Construct the base case projected P&L statement on the contract.

b. Sketch out a CVP analysis graph depicting the base case situation with number of visits on the x-axis. (Hint: use Excel to produce the sketch. When done, copy/paste the sketch below).

c. Compare and contrast this graph (see part b) with the one in Problem 1 of this homework.

d. What profit gain can be realized if the clinic can lower per member utilization to 1.8 visits per year?


Answers

Answer:

Problem 1)

part A

d) Given pretax profit =$100,000

Given Profit per unit=$75

Let Volume to sold= X

So total gross profit=75*X

So Pretax profit=75X-500000=100000

X=8000 units

Part B)

a)

Revenue =100* Volume

Fixed cost=$500000

Variable Cost =25*Volume

Total Cost = Fixed Cost + Variable cost

Average cost=Total cost / Volumes

For Volume =500

Revenue=100*500=$50000

Fixed cost=$500000

Variable Cost =25*500=$12500

Total Cost = 500000+12500=$512500

Average cost=Total cost / Volumes=512500/500=$1025

Volume Revenue Fixed Cost Variable cost Total  cost Average cost
0 0 500000 0 500000 NA
500 50000 500000 12500 512500 1025.00
1000 100000 500000 25000 525000 525.00
1500 150000 500000 37500 537500 358.33
2000 200000 500000 50000 550000 275.00
2500 250000 500000 62500 562500 225.00
3000 300000 500000 75000 575000 191.67
3500 350000 500000 87500 587500 167.86
4000 400000 500000 100000 600000 150.00
4500 450000 500000 112500 612500 136.11
5000 500000 500000 125000 625000 125.00
5500 550000 500000 137500 637500 115.91
6000 600000 500000 150000 650000 108.33
6500 650000 500000 162500 662500 101.92
7000 700000 500000 175000 675000 96.43
7500 750000 500000 187500 687500 91.67
8000 800000 500000 200000 700000 87.50

b) Since Volume and Average cost has inverse relationship Average cost=Total Cost/Volume

Average cost= (Variable Cost + Fixed Cost)/Volume= Average Variable cost+ Fixed Cost/Volume=25+500000/volume

From above equation it is clear that as the volume increase average cost decreases because Average variable cost remain same and average fixed cost decreases as the volume increases.

c)

CVP 琪)()()()() 800000 Break even Point 700000 Total Cost 600000 500000 8 400000 Fixed Cost Revenue 300000 200000 100000 i) 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 Base Case Volume

.

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