1.) Consider the data in the table below for three independent health services o

Question

1.) Consider the data in the table below for three independent health services organizations:

Revenues         Total Variable Costs   Fixed Costs     Total Costs                 Profit

a. $2,000         $1,400                         ?                      $2,000                         ?

b.                     1,000                           ?                      1,600                           $2,400

c.4,000                        ? $600                ? 400

2.) 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.

3.) ?Consider the CVP graphs below for two providers operating in a fee-for-service environment:

A.        Assuming the graphs are drawn to the same scale, which provider has the greater fixed costs? The greater variable cost rate? The greater per unit revenue?

B.        Which provider has the greater contribution margin?

C.        Which provider needs the higher volume to break even?

D.        How would the graphs below change if the providers were operating in a discounted fee-for-service environment? In a capitated environment?

Explanation / Answer

1. a. Fixed Cost = Total Cost - Variable Cost = 2,000 - 1,400 = $600
Profit = Revenue - Total Cost = 2,000 - 2,000 = 0

b. Fixed Cost = Total Cost - Variable Cost = 1,600 - 1,000 = $600
Revenue = Total Cost + Profit = 1,600 + 2,400 = $4,000

c. Total Cost = Revenue - Profit = 4,000 - 400 = $3,600
Variable cost = Total Cost - Fixed Cost = 3,600 - 600 = $3,000

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