Quiz 6: Cost-Volume-Profit Analysis

Business

Breakeven analysis: It is a managerial tool that is based on the cost, volume and profit. It determines required sales volume and dollar sales to compensate for the given cost structure or price level. At break-even point, total revenue is equal to the total cost. Hence, this is the situation of no profit, no loss. Above break-even point, company starts making profit. In other words, break-even point determines minimum revenue to be generated to recover the cost of production. Some of the assumptions with respect to breakeven analysis that the manager should consider are listed below: 1. Before starting breakeven analysis all costs should be separated into fixed and variable components. 2. At all volumes, fixed costs should remain constant. 3. Before starting breakeven analysis, it should be assumed that price for different types of patients and for different payers will be constant as volume changes. 4. In order to calculate breakeven, manager needs to estimate the average amount per patient which would be collected from the patients. 5. It is assumed that variable costs will remain same as they are.

Breakeven analysis: It is a managerial tool that is based on the cost, volume and profit. It determines required sales volume and dollar sales to compensate for the given cost structure or price level. At break-even point, total revenue is equal to the total cost. Hence, this is the situation of no profit, no loss. Above break-even point, company starts making profit. In other words, break-even point determines minimum revenue to be generated to recover the cost of production. The HU clinic provides annual checkups, sick visits and flu shots: img Rent on medical facilities is $120,000 per year. Other fixed costs are $5,000 per month. At breakeven point revenues are equal to the costs. Firstly breakeven point will be calculated to know the most pay which HU clinic would be able to pay each month to its employees which is calculated in the following way: Calculation of Revenues: Revenues consist of price per patient multiplied by number of patients. img img In the above table revenues are calculated by multiplying price per patient into the number of patients. So, the total revenue is $216,000. Calculation of total costs: Total costs are the sum of fixed costs (FC) and total variable costs. Total variable costs consists of the variable cost per patient times the number of patients. img For fixed costs, img So, fixed costs are $15,000. For total variable costs, img So, total variable costs are $18,000. Therefore, total costs are: img At breakeven point revenues are equal to the costs. But here revenues are $216,000 and costs are $33,000. So, it is clear that revenues are $183,000 more than costs. Therefore, the most pay that the HU Clinic can pay to their employees is img each month.

Breakeven analysis: It is a managerial tool that is based on the cost, volume and profit. It determines required sales volume and dollar sales to compensate for the given cost structure or price level. At break-even point, total revenue is equal to the total cost. Hence, this is the situation of no profit, no loss. Above break-even point, company starts making profit. In other words, break-even point determines minimum revenue to be generated to recover the cost of production. The essence of using breakeven analysis for multiple services and/or multiple prices is that breakeven analysis helps to know that how many patients are needed in the organization for each service to breakeven point. This is because after knowing breakeven point of a service organization works accordingly to attain the volume. Another essence of breakeven analysis is that it helps in making a decision of discontinuing a product or service.