Assume that the managers of Fort Winston Hospital are setting the price on a new
ID: 2638262 • Letter: A
Question
Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates:
Variable cost per visit: $5
Annual direct fixed costs: $500,000
Annual overhead allocation: $50,000
Expected annual utilization: 10,000 visits
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 the direct fixed costs are $1,000,000.
d.) Repeat Part a assuming both a $10 variable cost and $1,000,000 in direct fixed costs.
Explanation / Answer
a. Let per visit price for the service to break even be x
At break even point ,
Total contribution=Total fixed cost
10,000(x-5) =500,000+50,000
10,000x-50,000=550,000
x=$60
To earn desired profit of $100,000
Total contribution=Total fixed cost + desired profit
10,000(x-5) =500,000+50,000+100,000
x=$70
b)
At break even point ,
Total contribution=Total fixed cost
10,000(x-10) =500,000+50,000
10,000x-100,000=550,000
x=$65
To earn desired profit of $100,000
Total contribution=Total fixed cost + desired profit
10,000(x-10) =500,000+50,000+100,000
x=$75
c)
At break even point ,
Total contribution=Total fixed cost
10,000(x-5) =1,000,000+50,000
10,000x-50,000=1,050,000
x=$110
To earn desired profit of $100,000
Total contribution=Total fixed cost + desired profit
10,000(x-5) =1,000,000+50,000+100,000
x=$120
d)
Total contribution=Total fixed cost
10,000(x-10) =1,000,000+50,000
10,000x-100,000=1,050,000
x=$115
To earn desired profit of $100,000
Total contribution=Total fixed cost + desired profit
10,000(x-10) =1,000,000+50,000+100,000
x=$125
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