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 the population served will average two visits per year.

a. Construct the base case projected profit and loss 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 5.3.d.

c. What is the clinic’s contribution margin on the contract? How does this value compare with the value in Problem 5.3.b?

d. What profit gain can be realized if the clinic can lower per member utilization to 1.8 visits?