Question

Please answer questions for ONLY 5.9, I added 5.6 to compare it to 5.9 within 2 of the questions.

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

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

b. Sketch two CVP analysis graphs for the clinic—one with number of visits on the

x-axis, and one with number of members on the x-axis. Compare and contrast

these graphs with the one in problem 5.6, part d.

c. What is the clinic’s per-visit contribution margin on the contract? How does this

value compare with the value in problem 5.6, part b?

d. What profit gain can be realized if the clinic can lower per-member utilization to

1.8 visits?

5.6 Assume that a radiology group practice has the following cost structure:

Fixed costs $500,000

Variable cost per procedure 25

Charge (revenue) per procedure 100

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

a. Construct the group’s base case projected P&L statement.

b. What is the group’s contribution margin? What is its breakeven point (in num-

ber of procedures)?

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

of $200,000?

d. Sketch out a CVP analysis graph depicting the base case situation.

Answer 1

Answer of Question 5.9(as you asked for)(If you want me to answer for Quuestion 5.6 also then letme know in comment).

a) Projected P&L Statement:

Grandview Clinic
Projected P&L statement
Particular	Amount
Net Revenue ($150 * 20000 Members)	$30,00,000
Variable cost ($15(Per Visit) * 2 * 20000)	$6,00,000
Gross Profit(Contribution)	$24,00,000
Less:- Fixed Expenses	$20,00,000
Net Profit	$4,00,000

b)

i) CVP analysis graphs : Number of visits

Chart Title 3500000 3000000 Profit 1 2500000 2000000 Revanue & Cost in $ 1500000 Loss 1000000 500000 0 0 1000 5000 10000 25000 30000 35000 40000 15000 20000 Nuumber of Visit Revanue Fixed Cost -Total Cost

ii) CVP analysis graphs : Number of Members

Chart Title 3500000 3000000 Profit 2500000 2000000 Revanue & Cost in $ 1500000 Loss 1000000 500000 0 0 1000 5000 10000 15000 20000 Numbers of Members Revanue Fixed Cost Total Cost

in Question 5.6, Profit depends on the number of procedure performed while in question 5.9, profit change with the change in number of visit as well as number of members.

c) Per-visit contribution margin :

Total Number of visit = 20000*2 = 40000

Total Contibution = $24,00,000

Contribution margin per visit = Total Contribution/Total number of visit

Contribution margin per visit = $24,00,000/40000

Contribution margin per visit = $60 per visit

in Problem 5.6.b, as the contribution margin on a capitation contract is simply the total cost of the contract less variable costs(i.e. $100-$25=$75) rather than a calculation of variable cost by volume.

d) Gain on Lower per member utilization:

Grandview Clinic
Projected P&L statement
Particular	Amount
Net Revenue ($150 * 20000 Members)	$30,00,000
Variable cost ($15(Per Visit) * 1.8 * 20000)	$5,40,000
Gross Profit	$24,60,000
Less:- Fixed Expenses	$20,00,000
Net Profit	$4,60,000

An additional gain of $60,000 can be obtain on lowering the per member utilization to 1.8 visits.