Question

so performs laser surgery to correct eye vision. He charges $800 for eye surgery Problems (Show all work in neat form) 1. Dr. MaGoo performs laser surgery to corre (for a pair of eyes): Variable cost per eye surgery (per pair of eyes) are. Medical Supplies $35.00 Nurses time Utilities for the machine Variable marketing and administrative costs 24.50 The income tax rate is Fixed overhead cost is $100,000 per year. Fixed selline and administrative costs are $25.000 year. Dr. MaGoo performed 400 corrective eye surgeries last year. 65.00 10.50 30% a. What is the contribution margin per eye surgery? b. Suppose that Dr. MaGoo wants to make a profit (after tax) of $100,000, how many eye surgeries must be sold? (Round to nearest dollar for tax calculation) c. Suppose that Dr. MaGoo has another option available, which uses a scalpel (cut and sew option) rather than the laser (laser option). This option reduces the fixed costs by $49.950 per year and increases variable cost by $150 per surgery. Assume 333 is the number of eyes surgeries where MaGoo is indifferent between the two options. If MaGoo expects to perform less eye surgeries than 333 (but more than the breakeven). which option would McGoo prefer? (NOTE: at 333 MaGoo is indifferent because both options have the same profit.)

Answer 1

1)	Charges for each surgery			$        800
	Less:
	The variable cost for each surgery			$        135
	($35+65+10.50+24.50)
	Contribution margin per surgery			$        665
2)	Desired after-tax profit = $100000
	Desired before tax profit = $100000/(1-0.30)
	=$142857
	Eye surgeries must be sold for after-tax $100000 profit
	= (Desired before tax profit+ fixed cost)/ contribution margin per surgery
	=($142857+100000+25000)/$665
	=402.79 surgeries
	=403 surgeries	(rounded off )
3)	Cost indifferent sales = 333 surgeries
	that means a decrease in fixed cost would equal to the increase in variable cost.
	=$333*$150
	=$49950	variable cost
	=$-49950	fixed
	for less than 333 surgeries the saving from reduced fixed cost would be higher than
	increased in variable cost
	for example, let us say 300 surgeries
	Variable cost would increase = $150*300 =$45000
	The fixed cost would decrease =$49950
	Net Saving = $4950
	Hence it is beneficial to Dr. Ma Goo do less than 333 surgeries
	and opt for a new option.