Question 1
After successfully completing your master's degree you are appointed as CEO of a health care organisation - whose name cannot be revealed because of several pending legal cases. On the first day in your job the manager of one of your clinical departments shows you her budget variance report for the past 12 months. This reveals that the department is in line with budget for its spending on salaries, is 10% under budget for its drugs expenses and is about 15% under budget for spending on diagnostic tests such as ultra-sounds and X-rays. All other major expenses are either in line with or slightly under budget. The manager is extremely pleased with her performance and says that she deserves a bonus for managing the department's finances so well and coming in under budget. What do you think? How would you determine whether this manager is really under-budget?
Question 2
Assume that a radiologist group practice has the following cost structure:
Fixed costs: $500,000
Variable cost per procedure: $25
Revenue per procedure: $100
Assume that the group expects to perform 7,500 procedures in the coming year.
1. Construct the expected profit and loss statement for the coming year.
2. What is the group's contribution margin? What is its breakeven point?
3. What number of procedures must the group do to achieve a pre-tax profit of $100,000? How many procedures must be done to achieve a pre-tax profit of $200,000?
4. Suppose a new competitor enters the market and forces this group to reduce its charges to $80 per procedure. Redo questions (1), (2) and (3) under these conditions. What has happened to the break-even points?
Question 3
It is now May and you have been asked to do a budget for The Flu Shot clinic as the flu season will soon begin. The clinic will operate for the months of June and July. As the hospital has no spare space it will rent a room in a nearby shopping centre for the clinic. The clinic will also employ a nurse to give the injections and a receptionist to assist with arranging interviews. Vaccines cost $10 per patient. In addition, the clinic will give each patient either regular or glow-in-the-dark band aids. A regular bandaid is budgeted at $1, while a glow-in-the-dark band aid is budgeted at $2. Children always request glow-in-the-dark band aids. It is anticipated that the clinic will receive $40 for each child and $30 for each adult. During last year's flu season, the department saw 400 adults and 700 children each month and operated for 2 months.
The nurse is paid $5 per child and $3 per adult and the receptionist is paid $500 per month. Rent and utilities are $300 per month.
a. Using this information do a budget for the clinic for June and July.
b. The actual results for this clinic are shown below. Management want to know why the budgeted result and actual results for each month are different. Do a budget variance analysis for each month to identify what caused the actual and budgeted amounts to be different. You are told that in June the clinic actually saw 500 adults and 900 children, and in July the clinic saw 200 adults and 500 children.
c. Write a brief report to your manager summarising your findings and give recommendations for how to prepare the budget for next year.
Actual results
June July
Revenue 51,000 26,000
Costs
Vaccines 16,800 8,400
Band aids 2,750 1,450
Rent 400 400
Receptionist 500 600
Nurse 6,000 3,100
Total cost 26,450 13,950
Profit 24,550 12,050
QUESTION 4
A medical practice produces only one product - a standard consultation for which it receives $30. Variable expenses of the practice are $18 per consultation and total fixed costs per month are $3,500. The doctors in the practice conduct 1,800 consultations per month. Calculate the practice's profit or loss per month under each of the following independent situations:
1. A 25% increase in variable expenses
2. A 25% decrease in consultations
3. A 25% increase in fixed costs
4. A 25% increase in the consultation fee
5. A 25% increase in the consultation fee, plus an increase in variable expenses of 25%, plus a 25% decrease in consultations and a 25% decrease in fixed costs.
Which factor - variable costs, fixed costs, the number of consultations or the consultation fee - has the most influence on the practice's profits?