Question

Assume that Painless Dental Clinics, Inc., offers three basic dental services. The following are its prices and costs.

	Price per Unit			Variable Cost per Unit			Units Sold per Year
Cleaning	$	320		$	180		8,500
Filling		600			580		1,200
Capping		1,450			800		300

Variable costs include the labor costs of the dental hygienists and dentists. Fixed costs of $500,000 per year include building and equipment costs, marketing costs, and the costs of administration. Painless Dental Clinics is subject to a 20 percent tax rate on income.

A cleaning “unit” is a routine teeth cleaning that takes about 45 minutes. A filling “unit” is the work done to fill one or more cavities in one session. A capping “unit” is the work done to put a crown on one tooth. If more than one tooth is crowned in a session, then the clinic counts one unit per tooth (e.g., putting crowns on two teeth counts as two units).

Required:

a. Given this information, how much will Painless Dental Clinics, Inc., earn each year after taxes?

b. Assuming the given sales mix is the same at the break-even point, at what sales revenue does Painless Dental Clinics, Inc., break even?

c. Assuming the given sales mix, at what sales revenue will the company earn $160,000 per year after taxes?

d-1. Painless Dental Clinics, Inc., is considering becoming more specialized in cleanings and fillings. What would be the company’s revenues per year if the number of cleanings increased to 11,500 per year, the number of fillings increased to 1,300 per year, while the number of cappings dropped to zero? With this change in product mix, the company would increase its fixed costs to $550,000 per year. What would be the effect of this change in product mix on the clinic’s earnings after taxes per year?

d-2. If the clinic's managers seek to maximize the clinic's after-tax earnings, would this change be a good idea?

Answer 1