You are considering ways to expand an optometry practice and its earnings capaci

ID: 2403363 • Letter: Y

Question

You are considering ways to expand an optometry practice and its earnings capacity. Optometrists perform eye exams, prescribe corrective lenses (eyeglasses and contact lenses) and sell corrective lenses. One alternative that is being explored is to hire an additional optometrist to conduct additional eye exams. The annual cost of the optometrist, including salary, benefits, and payrol taxes is $63,000. You estimate that she can conduct two exams per hour, at an average price to the patient of $45 per exam. The new optometrist will work 40-hour weeks for 48 weeks per year However, because of scheduling conflicts, patient no-shows, training, and other downtime, she will be able to conduct exams, bill, and collect fees for some fraction less than 100 percent of her available examination time drives From past experience, you know that each eye exam additional product sales. Each exam might lead to either an eyeglass sale with a net profit (revenue less cost of sales) of $90 (not including the exam fee), or a contact lens sale with a net profit of S65 (not including the exam fee). You have also determined that 60 percent o sales, 20 percent lead to contact lens sales, and 20 percent of the exams lead to no further sales. f the exams lead to eyeglass Besides the salary of the optometrist, additional costs to support the new optometrist include the following: Office occupancy costs Leased equipment Office staff $1,200/year $330/year $23,000/year In terms of the percentage of available time, what is the minimum level of examinations that the new optometrist must perform to recover all the incremental costs from hiring her?

Explanation / Answer

Calculation of incremental cost:

S.no

Nature of cost

Amount(in $)

Salary , benefits, pay roll taxes

63000

Office occupancy cost

1200

Leased equipment

330

Office staff

23000

Total incremental cost

87530

Let number of tests conducted in the year by the new optometrist be “X”

Calculation of income derived from the new optometrist

Sno

Nature of income

Calculation

Amount(in $)

Fees earned

X * 45

45X

Sales of eye glasses

X* 0.60*90

54X

Sales of contact lens

X*0.20*65

13X

Total

112 X

Note :

Calculation of minimum level of tests to be performed to recover the incremental cost from the new optometrist:

Minimum level of test is where the total incremental costs are recovered i.e. total income is equal to total incremental expenses

112 X = 87530

X = 87530/112

X = 782

So minimum level of test to be performed to recover the incremental costs are 782 tests

Calculation of percentage of time:

Total time required to perform 782 tests = 782/2 =391 hours

(in one hour 2 tests can be performed)

Total time the new optometrist works = 40 hours *48 weeks

=1920 hours

Let us consider a down time of 5% of time loss for scheduling conflicts, training and other downtime

Available time = 1920 *(100-5) %

=1920 * 95%

=1824 hours

Minimum time to be worked to recover all incremental cost in terms of percentage of available time:

= minimum time to be worked to recover incremental cost

Available time

= 391/1824

=0.2143 or 21.43%