A nursing home presents the following revenue and expense information – Number o

Question

A nursing home presents the following revenue and expense information – Number of admissions: 8,000 Average Revenue per admission: 10,000 Variable Cost per admission: 2,000 Given that the nursing home's fixed costs are $40 million:

a. What is the nursing home’s net income?

b. Compute the volume of admissions required for the nursing home to achieve accounting breakeven?

c. If the nursing home is targeting profits of $20 million, what volume of admissions will achieve this economic breakeven?

d. Assume that all the admissions to this nursing home come from a single payer with 50,000 members who are to be covered under a capitated plan. What PMPM rate will the nursing home need to charge to retain its net income (from ‘a’ above)?

Explanation / Answer

Answer:

So the answers are:

a) Net income = F = $24,000,000

b) Break even point = E = 5,000 admissions

c) Volume required for required profit = (Target Profit+Fixed cost)/ Variable cost per admission

= ($20 million+$40 million)/$8,000 = 7,500 admissions

d)

Particulars In$ In $ (Total) No of admissions 8000 A) Revenue per admission 10000 80000000 B) Variable cost per admission 2000 16000000 C) Contribution per admission 8000 64000000 D) Fixed Cost incurred 40000000 40000000 E) Break even point in (No. of Admissions) = Fixed cost total/Variable cost per admission 5000 F) Net profit(A-B-D) 24000000

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