Question

. You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows:
Number of Visits	25,000	Utilities	$4,500
Wages and Benefits	$290,000	Medical Supplies	$45,000
Rent	$10,000	Administrative Supplies	$10,000
Depreciation	$40,000
Assume that all costs are fixed except supplies costs, which are variable.
a. What is the clinic’s underlying cost structure? b. What are the clinics expected total cost? c. What are the clinic’s estimated total cost at 7,500 visits? At 12,500 visits?

Answer 1

(a) Clinic's Underlying Cost Structure:-

Clinic's Underlying Cost Structure = Fixed Costs + Variable Costs * Volume

Where, Fixed Costs = Wages & Benefits + Rent + Depreciation + Utilities

            Variable Costs = Medical Supplies + Administrative Supplies

(Fixed costs in contrast to total variable costs, remain unchanged as the volume varies).

(b) Clinic's Expected Costs:-(25000 Visits)

Variable Costs:-             Per Unit Cost($)              Costs($)                    Total($)

Medical Supplies               45000/25000visits = $1.80           45000

Administrative Supplies    10000/25000visits = $0.40    10000               55000

Fixed Costs:-

Wages & Benefits                                                 290000

Rent                                                                 10000

Depreciation                                                        45000

Utilities                                                                     4500                        349500

Total Estimated Costs                                                   404500

(c) Clinic's Expected Costs:-

Variable Costs:-       Costs @7500 Visits                 Costs @ 12500 Visits

Medical Supplies                      $1.80*7500 = $13500                   $1.80*12500 = $22500

Administrative Supplies       $0.40*7500 = $3000                  $0.40*12500 = $5000

Fixed Costs:-

Wages & Benefits                          290000                                            249000

Rent                                                10000                                              10000

Depreciation                                   45000                                             45000

Utilities                                       4500                                               4500

Total Estimated Costs v                            366000          336000

Notes:- It is stated in the question that all costs are fixed costs except supplies which are variable only. Thus, there are two types of supplies are given in question, one is Medical supplies & other is administrative supplies. Both of these supplies are treated as variable costs, thus, varies according to the number of activities undertaken i.e. number of visits. Utilities and all other expenses are fixed costs according to information given in question, thus, these will remain same no matter how many number of visits are undertaken.