You are a radiologist trying to decide whether or not to buy an open MRI machine.  The machine costs $2.6 million.  You believe you can charge a premium for an open MRI and can realistically get $1,500 per scan.  The cost of labor for your tech is about $150 per scan, as well as the value of your own time, which you put at $200.

 
a. What is the break-even quantity of scans to pay for the MRI machine?

 
b.  A few months after you purchase the machine, you realize that the revenue model is more complex. Although your costs estimates were correct, your revenue comes at three different levels:  you get $1,500 per scan for privately insured patients; $1,100 for Medicare patients; and $650 for Medicaid patients.  The breakdown of your patient group is about 55 percent privately insured; 30 percent Medicare; and 15 percent Medicaid.  Now, what is the break even quantity?

 
c.  At the end of the year, you realize that you made less money than you thought you would. Your office wound up performing 3,000 scans.  But the electrical bill was sky high, and your liability coverage went up when you bought the scanner.  The electric bill averaged $8,000 per month more than before you bought the machine, and your annual liability coverage went up by $30,000.  Given this, do you revise your estimate on the break-even quantity to cover the scanner? How long will it take for you to recover your investment?

 
2.  The MRI business proved to be less glamorous than you had anticipated and you decide, instead, to found a non-profit theater.  Your theater will be a low-budget off-Broadway operation, presenting experimental plays in an old amphitheater in Prospect Park.  You cut a great deal with the Parks Department, which lets you lease the amphitheater for only $20,000/year.  You aim to produce 5 new productions annually, each using no more than 5 actors, with the theater open 6 nights per week.  You personally will be artistic director and producer, but you will need to hire set and lighting designers and crews, as well as house staff (ticket sellers and ushers).  You decide to make a programmatic rather than annual budget, for each of your five productions.  You estimate costs for each production as follows:

 
Set Designer:  $7,000

Lighting Designer:  $4,000

Actors:  $12,000

House Staff:  $6,000

Advertising:  $2,000

Royalties:  $10,000

(Use a spreadsheet)

a.  If you sell tickets for $30 each, how many tickets do you need to sell for each production to break even?

 
b.  You find that you simply cannot fill the seats, and decide to lower ticket prices to $25, and trim costs by cutting performances to only two nights per week, only paying actors and house staff for the evenings that they work.  This way you figure you can try to pack the audience in on Friday and Saturday nights, and save money on labor on the dark nights. The theater seats 100, and you find that in doing it this way you can sell out the theater.   Using this model, how many performances do you need to give of any production to break even?


3.  You are the budget manager of the organization Nurses Without Good Boundaries, an international aid group that rushes volunteer nurses off to disaster zones to provide emergency nursing care.  A massive earthquake has just hit Yonkers, and you are creating a budget for the relief effort.  Although you do not have to pay the nurses, you will have to cover the costs of their transportation and lunch, as well as purchase a liability insurance policy for each one for each day that they work.

You will need 1 nurse for each 20 disaster victims.  Lunch costs $10 per day per nurse, and liability coverage is $7 per day per nurse. For transportation, you bus the nurses from the bus terminal in Queens (the nurses are responsible for getting themselves to the bus terminal).  You have to pay $600 per day to charter the bus and driver; each bus can hold 30 nurses. You estimate that the relief effort will take 30 days (one month).

 In addition, you should budget in the cost of your administrator (who gets paid $36,000 per year) as well as your office supplies and utilities (which cost about $18,000 per year).

Which expenses are variable and which are fixed?  Are any of your expenses step-fixed?
What method would you suggest using to apply fixed costs to a disaster relief budget? Justify your answer.
Make a relief budget for 1000 victims.

4.  You are running a busy dialysis clinic.  You collect differing amounts from patients depending on what kind of insurance they have. Self-pays pay $100 per visit; those with private insurance pay $75 per visit; those with Medicare pay $50 per visit; and those with Medicaid pay $35 per visit.  The patient population is 10% self-pay, 40% privately insured, 30% Medicare, and 20% Medicaid.

The cost of providing dialysis to a patient is constant.  You spend $10 in power and supplies and $20 in labor.  The real budget breaker is the dialysis machine, however, which costs $1 million.

What is the break-even quantity for your practice?
If the machine can service 100,000 patients before needing to be replaced, what is a reasonable capital cost to apply to each patient?
Given your answer to b, how much money do you make or lose on each type of patient? (Do you see why some doctors refuse to treat Medicaid patients?)