Question 1.
You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows:
Number of visits 10,000
Utilities $2,500
Wages and benefits $220,000
Medical supplies $50,000
Rent $5,000
Administrative supplies $10,000
Depreciation $30,000
Assume that all costs are fixed except supplies costs, which are variable.
a. What is the clinic's underlying cost structure?
b. What are the clinic's expected total costs?
c. What are the clinic's estimated total costs at 7,500 visits? At 12,500 visits?
d. What is the average cost per visit at 7,500, 10,000, and 12,500 visits?
Question 2.
Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates: Variable cost per visit $5.00Annual direct fixed costs $500,000Annual overhead allocation $50,000Expected annual utilization 10,000 visits
a. What per visit price must be set for the service to break even? To earn an annual profit of $100,000?
b. Repeat Part a, but assume that the variable cost per visit is $10.
c. Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are $1,000,000.
d. Repeat Part a assuming both a $10 variable cost and $1,000,000 in direct fixed costs
Question 3.
Consider the following 2012 data for Newark General Hospital (in millions of dollars):
Simple Budget Flexible Budget Actual Results
Revenues $4.7 $4.8 $4.5
Costs 4.1 4.1 4.2
Profit 0.6 0.7 0.3
Simple Flexible Actual
Number of surgeries 1,2001, 3001, 300
Patient revenue $2,400 $2,600 $2,535
Salary expense $1,200 $1,300 $1,365
Nonsalary expense $600 $650 $585
Profit $600 $650 $585
a. Calculate and interpret the two profit variances.
b. Calculate and interpret the two revenue variances.
c. Calculate and interpret the two cost variances.
d. How are the variances related?
Question 4.
Fargo Memorial Hospital has annual patient service revenues of $14,400,000. It has two major third-party payers, and some of its patients are self-payers. The hospital's patient accounts manager estimates that 10 percent of the hospital's billings are paid (received by the hospital) on Day 30, 60 percent are paid on Day 60, and 30 percent are paid on Day 90. (Five percent of total billings end up as bad debt losses, but that figure is not relevant to this problem.)
a. What is Fargo's average collection period? (Assume 360 days per year throughout this problem.)
b. What is the hospital's current receivables balance?
c. What would be the hospital's new receivables balance if a newly proposed electronic claims system resulted in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days?
d. Suppose the hospital's annual cost of carrying receivables is 10 percent.
If the electronic claims system costs $30,000 a year to lease and operate, should it be adopted?
(Assume that the entire receivables balance has to be financed.)
Question 5.
Find the following values for a single cash flow: a. The future value of $500 invested at 8 percent for one year b. The future value of $500 invested at 8 percent for five years c. The present value of $500 to be received in one year when the opportunity cost rate is 8 percent d. The present value of $500 to be received in five years when the opportunity cost rate is 8 percent.
Question 6.
You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The system's price is $50,000, and it will cost another $10,000 for transportation and installation. The system is expected to be sold after three years because the laboratory is being moved at that time.
The best estimate of the system's salvage value after three years of use is $20,000.
The system will have no impact on volume or reimbursement (and hence revenues), but it is expected to save $20,000 per year in operating costs.
The not-for-profit business's corporate cost of capital is 10 percent, and the standard risk adjustment is 4 percentage points.
a. What is the project's net investment outlay at Year 0 ?
b.What are the project's operating cash flows in Years1, 2, and3?
c.What is the terminal cash flow at the end of Year 3?
d.If the project has average risk, is it expected to be profitable?
Question 7.
Here is the financial statement information on four not-for-profit clinics
Pittman Rose Beckman Jaffe December 31, 2011:
Assets $ 80,000 $ 100,000 g $ 150,000
Liabilities 50,000 d $ 75,000 j
Equity a 60,000 45,000 90,000
December 31, 2012:
Assets b 130,000 180,000 k
Liabilities 55,000 62,000 h 80,000
Equity 45,000 e 110,000 145,000
During 2012: Total revenues c 400,000 i 500,000
Total expenses 330,000 f 360,000 l
Fill in the missing values labeled a through l.
Question 8.
Southwest Physicians, a medical group practice in Oklahoma City, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a total margin of 5 percent. The group is considering two financing alternatives.
First, it can use all-equity financing by requiring each physician to contribute his or her pro rata share. Second, the practice can finance up to 50 percent of its assets with a bank loan.
Assuming that the debt alternative has no impact on the expected total margin, what is the difference between the expected return on equity (ROE) if the group finances with 50 percent debt versus the expected ROE if it finances entirely with equity capital?