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Crystal Lake Memory Care in Winona, Texas has 250 residents. The administrator, Ken Stone, is concerned...

Crystal Lake Memory Care in Winona, Texas has 250 residents. The administrator, Ken Stone, is concerned about balancing the ratio of its private pay to non-private pay patients. Non-private pay sources reimburse an average of $155 per day versus private pay residents who pay 90% of full daily charges. Stone estimates that the variable cost per resident per day is $80 for supplies, food, and contracted services, and annual fixed costs total $10 million.

What is the daily contribution margin of each non-private pay resident?

If 25% of the residents are non-private pay, what will Crystal Lake charge the private pay patients to break even?

What if non-private pay payors cover 50% of the residents? What will Crystal Lake need to charge the private pay patients to break even?

The investors insist that the facility earn $1 million in annual profits. How much must Stone raise the per day charge for the private pay residents in 25% of the residents are non-private pay?

Solutions

Expert Solution

Non- private pay Residents
Revenue per $ 155
Less: Variable costs 80
Contribution margin $ 75

Daily contribution margin per non-private pay resident : $ 75

At break-even,

Total contribution margin = Total annual fixed costs

Let the contribution margin for each private pay resident per day be C.

250 x 0.25 x 75 x 365 + 250 x 0.75 x C x 365 = 10,000,000

1,710,937.50 + 68,437.50 C = 10,000,000

C = $ 121.12

Amount to be charged to private pay resident per day for break-even = $ 121.12 + $ 80 = $ 201.12

If non-private pay payors cover 50% of the residents :

250 x 0.50 x 365 x 75 + 250 x 0.50 x 365 x C = 10,000,000

3,421,875 + 45,625 C = 10,000,000

or C = $ 144.18

Amount to be charged to private pay resident per day for break-even = $ 144.18 + $ 80 = $ 224.18

To earn $ 1,000,000 in annual profit,

250 x 0.25 x 75 x 365 + 250 x 0.75 x C x 365 = (10,000,000 + 1,000,000)

1,710,937.50 + 68,437.50 C = 11,000,000

C = 135.73

Amount to be charged to private pay patients per day to earn $ 1 million profit per year = $ 135.73 + $ 80 = $ 215.73

Stone must increase the per day charge for the private pay resident = $ 215.73 - $ 201.12 = $ 14.61 per day.

ekkarill92 answered 2 years ago
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