7.1 Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are relevant data estimates:
Variable cost per visit$5.00
Annual direct fixed costs$500,000
Annual overhead allocation$50,000 Expected annual utilization10,000
What per-visit price must be set for the service to break even? Toearn an annual profit of $100,000?
Repeat Part a, but assume that the variable cost per visit is $10.
Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are $1,000,000.
Repeat Part a assuming both $10 in variable cost and $1,000,000 in direct fixed costs.
7.2 The audiology department at Randall Clinic offers many services to the clinic's patients. The three most common, along with cost andutilization data, are as follows:
ServiceVariable Cost Annual DirectAnnual # Visits
per Service Fixed Costs
Basic exam$5$50,0003,000
Advanced examination$7$30,0001,500
Therapy session$10$40,000500
What is the fee schedule for these services, assuming that the goal is to cover only variable and direct fixed costs?
Assume that the audiology department is allocated $100,000 in total overhead by the clinic, and the department director has al located $50.000 of this amount to the three services listed above.What is the fee schedule assuming that these overhead costs mustbe covered? (To answer this question, assume that the allocation of overhead costs to each service is made on the basis of numberof visits.)
Assume that these services must make a combined profit of $25,000 .Now what is the fee schedule? (To answer this question, assumethat the profit requirement is allocated in the same way as overheadcosts.)lied Laboratories is combining some of its most common
7.3 Allied Laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs:
Test ATest BTest C
Disposable syringe$3.00$3.00$3.00
Blood vial0.500.500.50
Forms0.150.150.15
Reagents0.800.601.20
Sterile bandage0.100.100.10
Breakage/losses0.050.050.05
When the tests are combined, only one syringe, form, and sterile bandage will be used. Furthermore, only one charge for breakage/losseswill apply. Two blood vials are required, and reagent costs will remainthe same (reagents from all three tests are required).
As a starting point, what is the price of the combined test assuming marginal cost pricing?
Assume that Allied wants a contribution margin of $10 per test. What price must be set to achieve this goal?
Allied estimates that 2,000 of the combined tests will be conducted during the first year. The annual allocation of direct fixed and overhead costs total $40,000. What price must be set to cover full costs? What price must be set to produce a profit of $20,000 on thecombined test?
7.4 Assume that Valley Forge Hospital has only the following three payergroups:
Number ofAverage RevenueVariable Cost
Payer Admissionsper Admissionper Admission
PennCare1,000$5,000 $3,000
Medicare4,0004,5004,000
Commercial8,0007,000 2,500
The hospital's fixed costs are $38 million,
What is the hospital's net income?
Assume that half of the 100.000 covered lives in the commercial payer group will be moved into a capitated plan. All utilization andcost data remain the same. What PMPM rate will the hospital haveto charge to retain its Part a net income?
What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10 percent?
Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for the capitated group were lowered to $2,200?
8.1Consider the following 2011 data for Newark General Hospital (in millionsof dollars):
StaticFlexibleActual
BudgetBudgetResults
Revenues$4.7$4.8$4.5
Costs4.14.14.2
Profits0.60.70.3
a. Calculate and interpret the profit variance.
b. Calculate and interpret the revenue variance.
c. Calculate and interpret the cost variance.
d. Calculate and interpret the volume and price variances on the revenue side.
e. Calculate and interpret the volume and management variances on the cost side.
f. How are the variances calculated above related?
8.2 Here are the 2011 revenues for the Wendover Group Practice Association for four different budgets (in thousands of dollars):
FlexibleFlexible
StaticEnrollment/Utilization)(Enrollment)Actual
BudgetBudgetBudgetResults
$425$200$180$300
a. What does the budget data tell you about the nature of Wendover'spatients: Are they capitated or fee-for-service? (Hint: See the note to Exhibit 8.7.)
b. Calculate and interpret the following variances:
•Revenue variance
•Volume variance
•Price variance
•Enrollment variance
8.3 Here are the budgets of Brandon Surgery Center for the most recenthistorical quarter (in thousands of dollars):
StaticFlexibleActual
Number of surgeries1,200 1,3001,300
Patient revenue$2,400$2,600$2,535
Salary expense1,2001,3001,365
Non-salary expense600650585
Profit$600$650$585
The center assumes that all revenues and costs are variable andhence tied directly to patient volume.
a. Explain how each amount in the flexible budget was calculated. (Hint Examine the static budget to determine the relationship of each bud get line to volume.)
b. Determine the variances for each line of the profit and loss statement, both in dollar terms and in percentage terms. (Hint: Each line has atotal variance, a volume variance, and a price variance [for revenues and management variance [for expenses].)
c. What do the Part b results tell Brandon's managers about the surgery center's operations for the quarter?
8.4 Refer to Carroll Clinic's 2011 operating budget contained in Exhibit 8.3, Instead of the actual results reported in Exhibit 8.4, assume the resultsreported below:
Carroll Clinic: New 2011 Results
/. Volume:
A. FFS34,000visits
B.Capitated lives30,000members Number of member-months360,000
Actual utilization per
member-month0.12
Number of visits43,200 visits
C.Total actual visits77,200 visits
II.Revenues:
A.FFS$28per visit
X 34,000actual visits$952,000
B. Capitated lives$2.75PMPM
X 360,000 actual member-months $990,000
C.Total actual revenues$1,942,000
III. Costs:
A. Variable Costs:
Labor$1,242,000 (46,000 hours at $27/hour)
Supplies126,000 (90,000 units at $1.40/unit)
Total variable costs$17.72 ($1,368,000 / 77,200)
B. Fixed Costs
Overhead, plant,
and equipment$525,000
C. Total actual costs$1,893,000
IV. Profit & Loss Statement:
Revenues:
FFS$952,000
Capitated$990,000
Total$1,942,000
Costs:
Variable:
FFS$602,487
Capitated765,513
Total$1,368,000
Contribution Margin$574,000
Fixed Costs525,000
Actual profit$49,000
Construct Carroll's flexible budget for 2011.
What are the profit variance, revenue variance, and cost variance?
Consider the revenue variance. What is the component volume variance? The price variance?
Break down the cost variance into volume and management components.
Break down the management variance into labor, supplies, and fixed cost variances.
Interpret your results. In particular, focus on the differences between the variance analysis here and the Carroll Clinic illustration presented in the chapter.