Question

After the acquisition, the good doctor was presented by his Finance Manager the following costs in performing a particular procedure using the equipment:

4.1.      Share in the monthly salaries of the Admin staff                   $20,000

4.2.      Share in maintenance Costs                                                   $10,000

4.3.      Share in other monthly overhead costs                                 $130,000

4.4.      Supplies, medication needed in the procedure                     $15,000

Assuming the procedure’s price is pegged at $20,000, determine the needed total number of patients per month to break even. Assume a net income of $150,000 per month is desired, how many procedures must be done to accomplish this? How would the picture look assuming the cost of supplies and medication from the procedure increases to $22,000.

Answer 1

Answer 1:

Fixed cost = Share in the monthly salaries of the Admin staff + Share in maintenance Costs + Share in other monthly overhead costs

= 20000 + 10000 + 130000

= $160,000

Variable cost per procedure = Supplies, medication needed in the procedure = $15,000

Procedure’s price = $20,000

Contribution per procedure = (20000 - 15000) = $5,000

Break-even point (number of patients) = Fixed cost /Contribution per patient = 160000 /5000 = 32

Total number of patients per month to break even = 32

Answer 2:

Procedures must be done to EARN net income of $150,000 per month = (160000 + 150000) / 5000 = 62

Procedures must be done to EARN net income of $150,000 per month = 62

Answer 3:

Assuming the cost of supplies and medication from the procedure increases to $22,000:

Contribution income per procedure = 20000 - 22000 = - $2,000

The procedure does not make commercial sense if  the cost of supplies and medication from the procedure increases to $22,000, since the price does not cover even variable cost.

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