Question

You can charge $1,200 for a new service for which annual demand is anticipated to be 9,000 units. Your business is able to handle 7,300 procedures per year. The business will be covered by five payers: program 1 will cover 80% of charges for 5% of the patients; program 2 will pay 70% of charges for 15% of the patients, program 3 will pay 60% of charges for 20% of the patients, program 4 will pay 80% of charges for 10% of the patients, and program 5 will pay 90% of charges for 50% of the patients. The new service has annual fixed costs of $5,000,000. Variable cost per unit of service is $354. Use breakeven analysis to determine if this program opportunity should be pursued. Explain your reasoning.

Answer 1

Service charge = $ 1,200

Variable cost = $ 354

Contribution per unit = $ 1,200 - $354 = $ 846.

Fixed Cost = $ 5,000,000

Break even point (units) = Fixed cost / contribution p.u

Break even point = $ 5,000,000/$846

Break even point is 5,910.165 units.

Annual demand is anticipated at: 9,000 units.

Under Program 1: No. of units on which service charges can be covered = 9,000 x 5% x 80% = 360 units.

Under Program 2, No. of units on which service charges can be covered = 9,000 x 15% x 70% = 945 units

Under Program 3, No. of units on which service charges can be covered = 9,000 x 20% x 60% = 1,080 units

Under Program 4, No. of units on which service charges can be covered = 9,000 x 10% x 80% = 720 units

Under Program 5, No. of units on which service charges can be covered = 9,000 x 50% x 90% = 4,050 units.

Therefore, total no. of units on which charges can be covered = 360 + 945 + 1,080 + 720 + 4,050 = 7,155 units.

7,155 units is covering the break even units.

Therefore, this program opportunity should be pursued.

Hope this is helpful!!