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?

Answer 1

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)