Question

Fast Care is a health care franchise that functions as a primary family health clinic, seeing unscheduled patients 24 hours per day. A corporate office management engineering study has shown that the clinic was experiencing some dips in volume in the mid-afternoon hours. To increase volume, efficiney, and revenues, the clinic administrator contracted with the area high schools to provide after-school physicals for the sports teams. The initial agreement was that Fast Care would charge the market average which is $150 per visit. Fixed costs were $50,000 and variable costs were $55 per physical. Although this strategy proved somewhat successful, gross profit margin lagged behind the corporate expectations. To improve its margin, the clinic is considering increasing the visit price to $175. Fast Care projects that this price increase will cause the high schools to send their athletes to other providers which could cause a 33% decrease in volume. Last year, Fast Care performed 1,500 visits. If the program closes down entirely, all $50,000 in fixed costs would be saved.

a. Assuming that this price increase would decrease the number of patients by 33%, what should Fast Care do.

b What price would Fast Care have to charge to make up for the loss of patients

c. What if only 40% of the fixed costs are avoidable? What decision should Fast Care make in that case.

Answer 1

	Solution:
a	If Fast Care increases the price it will have the following 2 consequences
1	Patients visiting after 33% decrease = 1500*(1-0.33) = 1,005
	Revenue as per new rate:
	Particulars	Amount
	Collection (1,005*175)	175,875
	Less: Variable Cost (1,005*55)	55,275
	Less: Fixed Cost	50,000
	Profit (Collection- Variable cost- Fixed Cost)	70,600
2	If the program closes down entirely then saving in cost = 50,000
	So, Fast Care should go with option 1 as it is earning profit of 70,600 which is more than the saving in option 2
b	If Fast Care would not have lost the patients then it's earnings would be
	Particulars	Amount
	Collection (1,500*175)	262,500
	Less: Variable Cost (1,500*55)	82,500
	Less: Fixed Cost	50,000
	Profit (Collection- Variable cost- Fixed Cost)	130,000
	Let the new fee to be charged from each patient be 'x'
	1005 (x-55) - 50,000 = 130,000
	1005x - 55,275 - 50,000 = 130,000
	1005x = 130,000+55,275+50,000
	x = 235,275/1005
	x = 235
	If Fast Care wants to earn the same revenue as it was earning when rate was 150
	Then, revenue at that rate was
	Particulars	Amount
	Collection (1,500*150)	225,000
	Less: Variable Cost (1,500*55)	82,500
	Less: Fixed Cost	50,000
	Profit (Collection- Variable cost- Fixed Cost)	92,500
	Let the new fee to be charged from each patient be 'x'
	1005 (x-55) - 50000 = 92,500
	1005x - 55,275 - 50,000 = 92,500
	1005x = 92,500+55,275+50,000
	x = 197,775/1005
	x = 197
c	If only 40% of 50,000 i.e 20,000 is avoidable, then the company should not close it's program.