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CHAPTER 7: SERVICE LINE COSTING AND PRICING Homework 3.1, Chapter 7 a. Your hospital is considering...
CHAPTER 7: SERVICE LINE COSTING AND PRICING Homework 3.1, Chapter 7
a. Your hospital is considering offering a new outpatient service. Using the data below, determine the price needed to breakeven.
RELEVANT DATA:
Variable cost per visit $8
Annual direct fixed costs $650,000
Annual overhead allocation $70,000
Expected utilization (visits) 10,000
b. Assume now that the CEO is requesting to know what price must be set in order to earn a $100,000 profit. What price must be set in order to meet this desired profit level?
Solutions
Expert Solution
a. Computation of price needed to be breakeven at 10,000 visits:
Break Even visits = Fixed Cost/ Contribution Margin per visit
10,000 visit = ($650,000 + $70,000)/ Contribution Margin per visit
Therefore, Contribution Margin per visit = $72
Also, Contribution per visit = Selling price per visit - Variable expense per visit
$72 = Price per visit - $8
Therefore, Price per visit = $80
b.
Computation of Price necessary to attain desired income of $100,000
Desired Contribution = Fixed Cost + Desired income
Desired Contribution = $720,000 + $100,000 = $820,000
Price to achieve contribution of $820,000 at 10,000 visits means contirbution of $82 per visit
Contribution per visit = Selling price per visit - Variable expense per visit
$82 = Price per visit - $8
Therefore, Price per visit = $90
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