Question

The problem: 5.6

The fixed cost for a group practice is $500,000, Variable cost per procedure is 25 and the charge per procedure is 100. The group predicts to perform 7500 procedures in the year. How would I construct the group's base case projected P&L statement? What is the group's contribution margin? What is the breakeven point (in number of procedures)? What volume is required to provide a pretax profit of $100,000? A pretax profit of $200,000? Sketch out a CVP analysis graph depicting the base case situation. Assuming that the practice contracts with one HMO for all 7500 procedures and the plan proposes a 20 percent discount from charges...How would this affect previous answers under these conditions?

Answer 1

Ans.

Construct the group's base case projected P&L statement.

Particulars	Amount
Revenue(7500 * 100)	$750,000.00
Less: Variable costs(7500 * 25)	$187,500.00
Contribution	$562,500.00
Less: Fixed costs	$500,000.00
Profit	$ 62,500.00

What is the group's contribution margin?

Contribution per unit = selling price - variable cost per unit

=$ 100 - $25 = $75 per unit

contribution margin = $75 * 7500 units = $562,500

What is its break-even point?

Break even point = Fixed costs / contribution per unit

= $500,000 / $75 = 6,667 units (or procedures)

What volume is required to provide a pretax profit of $100,000? A pretax profit of $200,000?

Required sales (units) = (Required pre tax profit + Fixed costs) / contribution per unit

= ($100,000 + $500,000) / $75

= $600,000 / $75

= 8000 units

Required sales (units) = ($200,000 + $500,000) / $75

= 9,333 units

Sketch out a CVP analysis graph depicting the base case situation.

Assuming that the practice contracts with one HMO for all 7500 procedures and the plan proposes a 20 percent discount from charges...How would this affect previous answers under these conditions?

The revised selling price (revenue per procedure) will be 80% of $100 = $80

1. The group's P&L statement is given below:

Particulars	Amount
Revenue(7500 * 80)	$600,000.00
Less: Variable costs(7500 * 25)	$187,500.00
Contribution	$412,500.00
Less: Fixed costs	$500,000.00
Profit	$ (87,500.00)

2. Contribution per unit = selling price - variable cost per unit

=$ 80 - $ 25 = $55 per unit

contribution margin = $55 * 7500 units = $412,500

3. Break even point = Fixed costs / contribution per unit

= $500,000 / $55 = 9091units

4.

Required sales (units) = (Required pre tax profit + Fixed costs) / contribution per unit

= ($100,000 +$ 500,000) / $55

= $600,000 / $55

= 10,909 units

Required sales (units) = ($200,000 + $500,000) / $55

= 12,727 units