Healthcare Finance: An Introduction to Accounting and Financial Management
Healthcare Finance: An Introduction to Accounting and Financial Management
6th Edition
ISBN: 9781567937411
Author: Louis C. Gapenski, Kristin L. Reiter
Publisher: Health Administration Press
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Chapter 5, Problem 5.3P

(a)

To determine

Introduction: Profit & loss statement is a statement which presents the revenues and expenses of the company in a structured way to reflect the net income/loss earned the company. Primarily, there are two methods of presenting the profit & loss statement i.e. condensed and detailed.

To construct: The base case projected P&L statement for radiologist group.

(a)

Expert Solution
Check Mark

Answer to Problem 5.3P

Radiologist group’s net income is $62,500.

Explanation of Solution

Projected P&L statement for group is as follows:

    ParticularsPer procedureAmount
    Charge (revenue) for 7,500 patients $ 100 $ 750,000
    Less: Variable cost $ 25 $ 187,500
    Contribution $ 75 $ 562,500
    Less: Fixed cost  $ 500,000
    Net income $ 62,500

(b)

To determine

Introduction: Contribution margin can be computed by deducting variable cost from the sales value. Break-even point refers to a point where total expenses and total revenue of a company are equal. Break-even point can be described as a situation where there is no net profit or loss.

To find: Group’s contribution margin and breakeven point.

(b)

Expert Solution
Check Mark

Answer to Problem 5.3P

Group’s contribution margin is $562,500 and breakeven point is$666,667.

Explanation of Solution

  Contribution margin=SalesVariable cost=750,000187,500=$562,500

  Breakeven point = Fixed assetsContribution per procedure×Charge per procedure500,00075×100= $666,667

(c)

To determine

Sales volume at which group can earn a pre-tax profit of $100,000 and $200,000.

(c)

Expert Solution
Check Mark

Answer to Problem 5.3P

  • Sales volume to earn a profit level of $100,000 is $800,000.
  • Sales volume to earn a profit level of $200,000 is $933,333.

Explanation of Solution

Desired sales volume to earn a profit level of $100,000

  Desired sales volume=Fixed assets+Desired profitContribution per procedure×Charge per procedure=500,000+100,00075×100=$800,000

Desired sales volume to earn a profit level of $200,000

  Desired sales volume=Fixed assets+Desired profitContribution per procedure×Charge per procedure=500,000+200,00075×100=$933,333

(d)

To determine

Sketch out CVP analysis graph depicting base situation.

(d)

Expert Solution
Check Mark

Answer to Problem 5.3P

Breakeven point in CVP analysis graph is $666,667.

Explanation of Solution

  Healthcare Finance: An Introduction to Accounting and Financial Management, Chapter 5, Problem 5.3P , additional homework tip  1

The graph above depicts the CVP analysis. The horizontal line depicts the fixed costs in the above diagram which is to be incurred irrespective of sales volumes. The intersection point of sales and total expenses on CVP graph is referred to as “Break-even point”.

(e)

To determine

Recalculate sub-parts (a) to (d) when 20% discount is given from charges (revenue).

(e)

Expert Solution
Check Mark

Answer to Problem 5.3P

  • Radiologist group’s net loss is $87,500.
  • Group’s contribution margin is $412,500 and breakeven point is $727,273.
  • Sales volume to earn a profit level of $100,000 is $872,727.
  • Sales volume to earn a profit level of $200,000 is $1,018,182.

Explanation of Solution

(a) Radiologist group’s net income

    ParticularsPer procedureAmount
    Charge (revenue) for 7,500 patients $ 80 $ 600,000
    Less: Variable cost $ 25 $ 187,500
    Contribution $ 55 $ 412,500
    Less: Fixed cost  $ 500,000
    Net loss $ (87,500)

(b) Group’s contribution margin and breakeven point

  Contribution margin=SalesVariable cost=600,000187,500=$412,500

  Breakeven point = Fixed assetsContribution per procedure×Charge per procedure500,00055×80= $727,273

(c) Sales volume to earn a profit level of $100,000 and $200,000

  Desired sales volume=Fixed assets+Desired profitContribution per procedure×Charge per procedure=500,000+100,00055×80=$872,727

  Desired sales volume=Fixed assets+Desired profitContribution per procedure×Charge per procedure=500,000+200,00055×80=$1,018,182

(d) CVP analysis graph

  Healthcare Finance: An Introduction to Accounting and Financial Management, Chapter 5, Problem 5.3P , additional homework tip  2

The graph above depicts the CVP analysis. The horizontal line depicts the fixed costs in the above diagram which is to be incurred irrespective of sales volumes. The intersection point of sales and total expenses on CVP graph is referred to as “Break-even point”. Break-even point in the graph above is $727,273.

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