Problems

7.1 Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are relevant data estimates:

Variable cost per visit$5.00

Annual direct fixed costs$500,000

Annual overhead allocation$ 50,000

Expected annual utilization (visits)10,000

a.What per visit price must be set for the service to break even? To earn an annual profit of

$100,000?

Expected annual utilization x VC +annual direct fixed cost + annual overhead allocation

10,000(5) + $500,000 + 50,000 = 600,000

Sum / Expected annual utilization

600,000 / 10,000 = $60

Annual profit of $100,000 = Sum + 100,000

600,000 + 100,000 = 700,000

New sum / Expected Annual utilization

700,000 / 10,000 = $70

b.Repeat Part a, but assume that the variable cost per visit is $10.

Since the increase is only $5

Breakeven point= $65

Profit $100,000 = $75

c.Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are $1,000,000.

d.Repeat Part a assuming both $10 variable cost and $1,000,000 in direct fixed costs.

7.2 The audiology department at Randall Clinic offers many services to the clinic's patients. The three most common, along with cost and utilization data, are as follows:

1. What is the fee schedule for these services, assuming that the goal is to cover only variable and direct fixed costs?

1. Assume that the audiology department is allocated $100,000 in total overhead by the clinic, and the department director has allocated $50,000 of this amount to the three services listed above. What is the fee schedule assuming that these overhead costs must be covered? (To answer this question, assume that the allocation of overhead costs to each service is made on the basis of number of visits.)

1. Assume that these services must make a combined profit of $25,000. Now what is the fee schedule? (To answer this question, assume that the profit requirement is allocated in the same way as overhead costs.)