Question

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.

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

b. What is the group’s contribution margin?

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

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

e. 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
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000

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

g. Sketch out a CVP analysis graph depicting the base case situation. See Exhibit 5-4 (Hint: using data from part b (above), populate the following table. Produce the sketch using Excel. When done, copy/paste the sketch below the table)

Volume	Revenue	Fixed Costs	Total Costs
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000

Answer 1

a.

b.

Contribution margin is given by a product's price minus its variable costs. So, in this case contribution margin is $75 ($100 - $25).

c.

Break even point is the sales volume where total costs (variable + fixed) equal total sales. This represents the point of zero profit. Its formula is given as:

Price per unit * N = Variable cost per unit * N + Fixed costs

where, N is the breakeven volume. On substituting the given values, we get

100 * N = 25 * N + 500,000

N = 6,666.67 or 6,667 (rounded off)

d.

$Pretax\:profit=(Sales\: price-Variable\:cost)*N-Fixed\: cost$

$100,000=(100-25)*N-500,000$

or N = 8000 units

e.

f.

Average cost reduces exponentially as volume increases. Following graph shows the relationship between the two.

g.