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.

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:

Particulars	Per procedure	Amount
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.

Answer to Problem 5.3P

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

Explanation of Solution

  $\begin{array}{c}\text{Contribution margin}=\text{Sales}-\text{Variable cost}\\ =750,000-187,500\\ =\$562,500\end{array}$

  $\begin{array}{c}\text{Breakeven point = }\frac{\text{Fixed assets}}{\text{Contribution per procedure}}\times \text{Charge per procedure}\\ \text{= }\frac{500,000}{75}\times 100\\ \text{= \$666,667}\end{array}$

(c)

To determine

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

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

  $\begin{array}{c}\text{Desired sales volume}=\frac{\text{Fixed assets}+\text{Desired profit}}{\text{Contribution per procedure}}\times \text{Charge per procedure}\\ =\frac{\text{500,000+100,000}}{75}\times 100\\ =\text{\$800,000}\end{array}$

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

  $\begin{array}{c}\text{Desired sales volume}=\frac{\text{Fixed assets}+\text{Desired profit}}{\text{Contribution per procedure}}\times \text{Charge per procedure}\\ =\frac{\text{500,000+200,000}}{75}\times 100\\ =\text{\$933,333}\end{array}$

(d)

To determine

Sketch out CVP analysis graph depicting base situation.

Answer to Problem 5.3P

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

Explanation of Solution

  

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).

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

Particulars	Per procedure	Amount
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

  $\begin{array}{c}\text{Contribution margin}=\text{Sales}-\text{Variable cost}\\ =600,000-187,500\\ =\$412,500\end{array}$

  $\begin{array}{c}\text{Breakeven point = }\frac{\text{Fixed assets}}{\text{Contribution per procedure}}\times \text{Charge per procedure}\\ \text{= }\frac{500,000}{55}\times 80\\ \text{= \$727,273}\end{array}$

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

  $\begin{array}{c}\text{Desired sales volume}=\frac{\text{Fixed assets}+\text{Desired profit}}{\text{Contribution per procedure}}\times \text{Charge per procedure}\\ =\frac{\text{500,000+100,000}}{55}\times 80\\ =\text{\$872,727}\end{array}$

  $\begin{array}{c}\text{Desired sales volume}=\frac{\text{Fixed assets}+\text{Desired profit}}{\text{Contribution per procedure}}\times \text{Charge per procedure}\\ =\frac{\text{500,000+200,000}}{55}\times 80\\ =\text{\$1,018,182}\end{array}$

(d) CVP analysis graph

  

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.