Assume that the managers of Fort Winston Hospital are setting the price on a new
ID: 1093309 • Letter: A
Question
Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are relevant data estimates:
Variable cost per visit $ 5.00
Annual direct fixed costs $500,000
Annual overhead allocation $ 50,000
Expected annual utilization 10,000
a. What per-visit price must be set for the service to break even? To earn an annual profit of $100,000?
b. Repeat Part a, but assume that the variable cost per visit is $10.
c. Return to the data given in the problem. Again repeat Part a, but
assume that direct fixed costs are $1,000,000.
d. Repeat Part a assuming both $10 in variable cost and $1,000,000 in direct fixed costs.
Explanation / Answer
What per visit price must be set for the service to break even?
(10,000 x P) - (10,000 x $5) - 500,000- 50,000 = 0
10,000 x P = $600,000
P= $60
To earn an annual profit of $100,000?
$600,000 + $100,000 = $700,000
$700,000 / 10,000 = $70
Repeat Part a, but assume that the variable cost per visit is $10.
(10,000 x P) - (10,000 x $10) - 500,000 - 50,000
10,000 x P = $650,00
P = $65
Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are
$1,000,000.
(10,000 x P) - (10,000 x $5) - 1,000,000 - 50,000
10,000 x P = 1,100,000
P = $110
Repeat Part a assuming both a $10 variable cost and $1,000,000 in direct fixed costs.
(10,000 x P) - (10,000 x $10) - 1,000,000 - 50,000
10,000 x P = $1,150,000
P = $115
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