Question

Question #4: 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?

Answer 1

A) Non private pay resident contribution = revenue - variable cost = $155 - $80 = $75

B)

Break even point is the point where the business covers its variable and fixed costs thus at break even contribution is equal to fixed cost.

Contribution = fixed cost

250 x 0.25 x 75 x 365 + 250 x 0.75 x X* x 365 = 10,000,000

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

X = $ 121.12

* Let contribution margin for each private pay resident per day be X.

Hence amount to be charged = $121.12 + $80 = $201.12

C) same as before to break even contribution = fixed cost

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

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

or X = $ 144.18

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

D)

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

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

Contribution - fixed cost = profit

Contribution = fixed cost + profit

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

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

x = 135.73

Amount to be charged = $ 135.73 + $ 80 = $ 215.73

.

i have given complete and detailed solution of your question. in case of any issue please COMMENT and
PLEASE DO GIVE A THUMBS UP