1) Assume that a radiologist group practice has the following cost structure:
Fixed costs $500,000
Variable Cost per procedure $25
Charge (revenue) per procedure $100
Furthermore, assume that the group expects to perform 7,500 procedures in the coming year.
a.) Construct the group's base case projected P & L statement.
b.) What is the group's contribution margin? What is its breakeven point?
c.) What volume is required to provide a pretax profit of $100,000? A pretax profit of $200,000
d.) Sketch out a CVP analysis graph depicting the base case situation.
e.) Now assume that the practice contracts with one HMO, and the plan proposes a 20 percent
Discount from charges. REDO questions a, b, c, and d under these conditions.
2) You are considering starting a walk-I clinic. Your financial projections for the first year of
operations are as follows:
Revenues (10,000 visits) $400,000
Wages and benefits $220,000
Rent $ 5,000
Depreciation $ 30,000
Utilities $ 2,500
Medical supplies $ 50,000
Administrative supplies $ 10,000
3) Review the walk-in clinic data presented in problem 5.5. Constuct projected P & L statements at
volume levels of 8,000, 9,000, 10,000, 11,000, and 12,000 visits.
a.) assume that the base case forcast is 10,000 visits. What is the clinic's degree of operating
leverage (DOL) at this volume level? Confirm the net incomes at the other volume levels
using the DOL combined with the percent chages in volume.
b.) Now assume that the base case volume is 9,000 visits. What is the DOL at this volume?
4) The Housekeeping Service department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000
in direct costs in 2007. These costs must be allocated to Ruger's three revenue-producing patient services departments
using the direct method. Two cost drivers are under consideration :patient services revenue and hours of housekeeping
services used. The patient services departments generated $5 million in total revenues in 2007, and to support these
clinical activities, they used 5,000 hours of housekeeping services.
1. What is the value of the cost pool?
The value of cost pool is 100,000
2. What is the allocation rate if:? a. Patient services revenue is used as the cost driver?
Allocation Rate = Cost / Patient service revenue
= 100,000 / 5,000,000
= 0.02 per patient service revenue
b. Hours of housekeeping services is used as the cost driver?
Allocation Rate = Cost / Book keeping service
= 100,000 / 5,000
= 20 per housekeeping hours
5) Assume that the three patient services departments are adult services,
pediatric services, and other services. The patient services revenue and hours of housekeeping
services for each departments are
Department Revenue Housekeeping hours
Adult services $3,000,000 1,500
Pediatric services 1,500,000 3,000
Other services 500,000 500
Total $5,000,000 5,000
a.) What is the dollar allocation to each patient services department if patient services revenue is used as the cost driver?
b.) What is the dollar allocation to each patient services department if hours of housekeeping support are used as the cost driver?
c.) What is the difference in the allocation to each department between the two drivers?
d.) Which of the two drivers is better? Why?
6) The audiology department at Randall Clinic offers many services to the clinic's patients. the three most common, along with cost and utilization data, are as follows:
Variable Cost Annual Direct Annual Number
Service per service Fixed Costs of Visits
Basic Examination $ 5 $50,000 3,000
Advanced examination 7 30,000 1,500
Therapy session 10 40,000 500
a.) What is the fee schedule for these services, assuming that the goal is to cover only variable and direct fixed costs?
b.) Assume that the audiology department is allocated $100,000 in total overhead by the clinic, and the department director has allocated $50,000 of this amount to the three services listed above.
What is the fee schedule assuming that these overhead costs must be covered? (To answer this question, assume that the allocation of overhead costs to each services is made on the basis of number of visits.)