Assume the radiology group pactice has the follwoing cost structure: Fixed costs

Question

Assume the radiology group pactice has the follwoing cost structure: Fixed costs = $500,000 Variable cost per procedure = $25 Charges (revenue) per procedure = $100 The group expects to perfomr 7500 procedures next yeat. A. Construct a groups base projected P&L statement B. What is the groups contribution margin? What is its breakeven point? C. What is the volume required to provide pre tax profit of $100,000? D. Assume the practice contracts with an HMO and the plan purposes a 20% discount from charges. Construct the new P&L. What is the breakeven point?

Explanation / Answer

Fixed cost = 500,000

Variable cost per procedure = 25 per procedure

Revenue per procedure = 100 per procedure; Expected procedures = 7500; Expected revenue = 750,000

Total cost = 25*7500 + 500,000 = 687,500

A. Contribution margin = (Aggregate sales - Aggregate variable expenses)/Number of units sold

=(750,000-187,500)/7500 = $75

B. Breakeven point : 500,000 + 25(BP) = 100(BP); BP = 6666.67 or 6667 units

C. To provide pre tax profit of $100,000:

Let the number of units sold to be A: 100A-(25A+500,000) = 100,000

So, A = 8000 units

D. Assuming that the plan proposes a 20% discount from charges,

25A + 500,000 = (1-0.2)*100*A

Therefore, the new brekeven point = A = 9091 units

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