Question

1. Assume that managers of Forth Winston Hospital are setting the price on a new outpatient service. Here are relevant data estimates:

Variable cost per visit                         $8

Annual Direct Fixed Costs                 $800,000

Annual Overhead Allocation              $180,000

Expected Annual Utilization              18,000 visits

1. What per visit price must be set for the service to breakeven? To earn an annual profit of $80,000?
2. Repeat Part a, but assume that the variable cost per visit is $12.

Please include the input used in a financial calculator if it is needed.

Answer 1

Answer :

a)

Particulars	Amount
Variable cost ( 18,000 * $8 )	$ 144,000
Annual direct fixed cost	$ 800,000
Annual overhead allocation	$ 180,000
Total cost to be recovered	$ 1,124,000
Number of visits	18,000
Price per visit to Breakeven	$ 62.44

Particulars	Amount
Variable cost ( 18,000 * $8 )	$ 144,000
Annual direct fixed cost	$ 800,000
Annual overhead allocation	$ 180,000
Profit to be earned	$ 80,000
Total cost to be recovered	$ 1,204,000
Number of visits	18,000
Price per visit to Breakeven	$ 66.88

b)

Particulars	Amount
Variable cost ( 18,000 * $12 )	$ 216,000
Annual direct fixed cost	$ 800,000
Annual overhead allocation	$ 180,000
Total cost to be recovered	$ 1,196,000
Number of visits	18,000
Price per visit to Breakeven	$ 66.44

Particulars	Amount
Variable cost ( 18,000 * $12 )	$ 216,000
Annual direct fixed cost	$ 800,000
Annual overhead allocation	$ 180,000
Profit to be earned	$ 80,000
Total cost to be recovered	$ 1,276,000
Number of visits	18,000
Price per visit to Breakeven	$ 70.88