Problem 1

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.

Part A

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

P & L Statement

Revenue 750,000 (100 x 7500)

Variable Costs -187,500 (25 x 2500)

Contribution 562,500

Fixed Costs -500,000

Net income/profit 62,500

b. What is the groups contribution margin?

Contribution margin = 100 25 = 75 per product and 562,500 in total for 7500 products

c. What is the groups breakeven point in volume?

Breakeven point is 500,000/75 = 6,666.67 = 6,667

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

Part B

a. 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
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000

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

c. Sketch out a CVP analysis graph depicting the base case situation. (Hint: use Excel to produce the sketch. When done, copy/paste the sketch below).

Problem 2

You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows

Revenues (10,000 visits)	$400,000
Wages and benefits	220,000
Rent	5,000
Depreciation	30,000
Utilities	2,500
Medical supplies	50,000
Administrative supplies	10,000

Assume that all costs are fixed, except medical supplies and administrative supplies, which are variable. Furthermore, assume that the clinic must pay taxes at 30 percent rate.

a. Construct the clinics projected P&L statement.

EXPENSES AMOUNT INCOME AMOUNT

Wages and benefits 220,000 revenue 400,000

Rent 5,000

Depreciation 30,000

Utilities 2,500

Medical Supplies 50,000

Administrative Supplies 10,000

Profit 82,500

TOTAL 400,000 400,000

Profit = 82,500

Tax -24,750

$57,750

b. What number of visits is required for break-even? (Hint: At breakeven, there is zero taxable income and hence zero taxes).

Break even point = fixed cost/cont pu

= 257,500/34

= 7573.52

= 7574 visits

c. What number of visits is required to provide you with an after-tax profit of $100,000?

Profit before tax = (100,000/70) x 100

= 142,857

Number of visits required = fixed cost + profit before tax/cont pu

= 257,500 + 142,857/34

= 11,775 visits

Problem 3

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

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

b. Sketch out a CVP analysis graph depicting the base case situation with number of visits on the x-axis. (Hint: use Excel to produce the sketch. When done, copy/paste the sketch below).

c. Compare and contrast this graph (see part b) with the one in Problem 1 of this homework.

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