Assume that a certain nursing home has 2 categories of payers. Medicaid pays $60

Question

Assume that a certain nursing home has 2 categories of payers. Medicaid pays $60.00 per day and private pay patients pay the established per diem, but approximately 10% of private pay charges are not collected. If 50% of the patients are Medicaid and 50% are private pay, what rate must be set to generate $150,000 in profit? Variable costs are $45.00 per day and fixed costs are expected to be $1,000,000. Expected volume is 50,000 patient days.



Using the same data and assuming the nursing home charges $100 per day, what would be the nursing home's required volume (in patient days) in order to make $150,000 profit?

Explanation / Answer

Finding the rate when the profit is $150,000: As we know [(S-VC) * V ]- FC = TP where S = Rate per day VC = Variable cost per day V = Volume per day FC = Fixed costs TP = Target profit Now substituting the values in the above formula to find the value of S [(S-$45) * 50,000] - $1,000,000 = $150,000 [$50,000 S - $2,250,000] = $1,150,000 $50,000 S = $3,400,000 S = $68 Therefore, the rate should be $68 to generate $150,000 in profit. In the second para, the rate is given as $100 per day.Here we need to find out the sales volume that is required to generate a profit of $150,000. Substituting the values in the above formula, we get [($100-$45) * V] - $1,000,000 = $150,000 55V = $1,150,000 V = 20,909 Therefore, the sales volume should be 20,909 to make a net operating profir of $150,000.

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