In: Accounting
COSTS AND REVENUES FOR URGENT CARE CENTER
COSTS: Urgent Care Center
All costs and revenues are per year
* Labor Cost
5 Primary Care Physicians Salary $150,000 $ 750,000
8 RN/BSN Salary Salary $ 64,000 $ 512,000
Payroll Taxes (all employees) $ 327,400
Benefits (all employees) $1,893,000
* Other Variable Costs
Supplies & Misc. Overhead $ 102,400
Advertising $ 35,000
TOTAL VARIABLE COST $3,619,800
* Capital Cost
Annualized Building Cost $ 465,403
Annualized Equipment Cost $ 93,081
* Other Fixed Costs
Insurance $ 341,295
Legal $ 232,701
Administrative $ 418,873
Administrative Fee to Franchise $ 120,000
TOTAL FIXED COST $ 1,671,343
REVENUES: Urgent Care Center
Each for the five (5) primary care physicians can see 3200 patients in a year, at an average annual fee per patient of $300.
Question 1: Feasible Range for the Urgent Care Center
In order to justify our scale of operation we must be able to attract enough patients to be inside the feasible range of production. The feasible range is governed by the way productivity changes as more staff must share the fixed resources. Unfortunately it is rare for detailed information about productivity to be available to decision-makers. However because of the one-to-one correspondence between productivity and cost, we can see the boundaries of the feasible range reflected in our variable costs, and these costs are always available to decision makers on a detailed and up-to-date basis.
Step 1: Find Average Variable Cost by dividing the Total Variable Cost by the total number of patients served by all four physicians, given under Revenues.
Step 2: The fee per patient is also given under Revenues. Does the fee per patient cover the Average Variable Cost?
Question 2: Breaking Even for the Urgent Care Center
In the short run it is enough to establish that your scale of operation is justified, but in the long run we have to cover our capital costs as well as our labor and other variable costs.
Step 1: Find the Total Cost by summing the Total Variable Cost and Total Fixed Cost.
Step 2: Find the Average Total Cost by dividing Total Cost by the total number of patients served by four physicians.
Step 3: Does the fee per patient cover the Average Total Cost?
Patients served by 1 physician annually = 3,200
Hence, total patients served by 5 physicians annually = 3,200 x 5
= 16,000
(i) Average variable cost = Total variable cost
Total number of patients served
= 3,619,800
16,000
= $226.24
(ii) Fee per patient = $300
Since the fee per patient is more than the average variable cost, hence it covers average variable cost.
(iii) Contribution margin per patient = Fee per patient - Average variable cost per patient
= 300 - 226.24
= $73.76
Break even point = Fixed cost
Contribution margin per patient
= 1,671,343
73.76
= 22,659 patients
Hence to break even, annually 22,659 patients must be served.
(iv) Total cost = Total variable cost + Total fixed cost
= 3,619,800 + 1,671,343
= $5,291,143
(v) Average total cost = Total cost
Total number of patients served
= 5,291,143
16,000
= $330.7
(vi) Since the fee per patient is less than average total cost, hence it does not cover average total cost.