Eric runs a chiropractic center in Mililani. The annual ? xed costs for operatin
ID: 2358361 • Letter: E
Question
Eric runs a chiropractic center in Mililani. The annual ? xed costs for operating Chiro-Care clinic is $222,000. The variable cost per patient treated is $55. The price billed for each visit is $136. Currently, he has around 2500 visits a year.a. Is he making a pro? t?
b. He doesn’t think he can increase demand, so he is thinking about a cost-cutting measure for his
variable costs. What would his variable costs need to be in order for him to break even at 2500
visits a year?
John is thinking about getting into the tourism business in Oahu. He will take visitors on a whole-day trip to the main tourist spots on the island in a new van he is planning to buy. He would like to know how many tourists he has to move daily to have a before-taxes pro? t of $1000 per month so he can save that money. He will work 25 days per month.
His costs for the new business would be as follows:
Variable costs per day trip
Gasoline: $ 30
Maintenance: $ 5 (oil, tune-ups, wheels, repairs, etc.)
Fixed costs
Leasing and insurance: $ 1000 per month
Personal expenses: $1000 (the minimum amount he needs for living expenses) per month
He is planning to charge $ 45 per visitor for a day trip.
Using the break-even formula, John will need how many daily travelers in order to achieve a pro?t of $1000 per month?
Explanation / Answer
1. Eric runs a chiropractic center in Mililani. Annual Fixed costs =$222,000. Variable cost per patient =$55. Sale Price = Price billed for each visit=$136. Currently, he has around 2500 visits a year. SO COnt per patient = Price billed - Var cost = 136-55 = $81 a. Is he making a pro? t? Total Cont = COnt per ptient * No of Visits = $81*2500 = $202500 Profit = Total Cont - Fixed costs = $202500-$222000 = -$19500 So Eric is making a Loss of $19500 per year at current volum of 2500 visits b. He doesn’t think he can increase demand, so he is thinking about a cost-cutting measure for his variable costs. What would his variable costs need to be in order for him to break even at 2500 visits a year? BEP = Fixed costs/COnt per visit SO Cont pu at BEP = Fixed costs/BEP = $222000/2500 = $88.80 COnt pu = Sale price - Var cost So Var cost = Sale price - Cont pu = $136 - $88.80 = $47.20 So Eric's var cost per patient needs to be $47.20 to enable him to Breakeven at 2500 patient visits
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