Question

In: Accounting

Using the following information ... to forecast the incremental expected Profit or Loss from the new...

Using the following information ... to forecast the incremental expected Profit or Loss from the new clinic.

Generic Hospital is contemplating the opening of a clinic in an underserved rural community. The marketing people project 5,000 office visits in year one with an average charge of $100 per clinic visit. The consensus is that half of the visits will be Medicare patients with an average payment of $50 per visit. Thirty percent (30%) of the visits are expected to be from patients insured with BC with the expectation for payment set at 80% of the average charge. Another 15% of the patients will have some form of Medicaid coverage with an expected payment of $20 per visit. The remaining patients are expected to be bad debt and charity care with no payment. The expenses consist of $120,000 for salary and benefits. This covers one nurse practitioner and one all purpose assistant. The office lease, insurance, and other fixed costs are projected to be $60,000 per year. The hospital would borrow $20,000 (Debt) from the Bank to buy used Equipment to outfit the office. The interest on the loan would be $1,500 in year one. The equipment to outfit the space cost $20,000 and has an expected useful life of 5 years. The variable cost for such items as supplies, forms, and postage is estimated at $10.00 per visit. Assuming no allocation of any corporate overhead, compute the forecasted year 1 profit or loss.

(do not to confuse Balance Sheet items with those needed to prepare a forecasted P&L)

Solutions

Expert Solution

Particulars Amount
Revenue from operations $ 260,000.00
(Note 1)
Less: Expenses
Salary and benefits $ 120,000.00
Office lease, insurance, fixed costs $    60,000.00
Interest on loan $      1,500.00
Depreciation (Note 2) $      4,000.00
Other variable costs (5000* $ 10) $    50,000.00 $ 235,500.00
Profit for the year $    24,500.00
Note 1 Revenue from operations
No. of patients Rate Amount
50% of 5000 = 2500 $50 $    125,000.00
30% of 5000 = 1500 80% of $ 100 = $ 80 $    120,000.00
15% of 5000 = 750 $20 $      15,000.00
Total 4750 $    260,000.00
Note 2 Depreciation
Rate of depreciation = Cost/Useful life
= $ 20000/5 years
= $ 4,000.00
Therefore, each year, $ 4000 depreciation would be charged

Since in revenue from operations, I've only considered the patients who are paying their above mentioned visiting charges, there's no need to consider bad debts separately. Had i considered the average charges of $ 100 per visit, consideration of bad debt would had been needed too.


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