Assume that the managers at Fort Winston Hospital are setting the price on a new
ID: 2704678 • Letter: A
Question
Assume that the managers at Fort Winston Hospital are setting the price on a new outpatient service. The relevant data estimates:
Variable cost per visit $ 5.00
Annual direct fixed costs $ 500,000
Annual overhead allocation $ 50,000
Expected annual utilization 10,000 visits
a. A. What per visit price must be set for the service to breakeven? Then to earn an annual profit of $100,000?
b. B. Repeat part a, but assume that the variable cost is $10.
c. C. Repeat part a assuming both a $10 variable cost and $1,000,000 in direct fixed costs.
Explanation / Answer
a. Breakeven = fixed cost/(SP -VC)
10,000 = (500000+50000)/(SP-5)
SP = $60
Per pisit price for breakeven =$60
annual profit of $100,000
10,000 = (500000+50000+100000)/(SP-5)
SP = $70
Per pisit price for annual profit =$70
b. Breakeven = fixed cost/(SP -VC)
10,000 = (500000+50000)/(SP-10)
SP = $65
Per pisit price for breakeven =$65
annual profit of $100,000
10,000 = (500000+50000+100000)/(SP-10)
SP = $75
Per pisit price for annual profit =$75
c. Breakeven = fixed cost/(SP -VC)
10,000 = (1,000,000)/(SP-10)
SP = $110
Per pisit price for breakeven =$110
annual profit of $100,000
10,000 = (1,000,000+100000)/(SP-10)
SP = $120
Per pisit price for annual profit =$120
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