Quiz+ | Quiz 6: Cost-Volume-Proﬁt Analysis

Q 1

What are some assumptions underlying breakeven analysis that require consideration by a manager employing the technique?

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Essay

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.

Q 2

The Heal Up Clinic provides annual checkups for a charge of $200, sick visits for $100, and flu shots for $40. They expect to have 500 checkups, 1,000 sick visits, and 400 flu shots each month. The variable costs re lated to annual checkups are $10, related to sick visits are $5, and related to flu shots are $20. Rent on their medical facilities is $120,000 per year. Other fixed costs for utilities are $5,000 per month. If the owners of the clinic want to at least break even, what is the most they can pay their employees each month?

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Essay

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: 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. 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. For fixed costs, So, fixed costs are $15,000. For total variable costs, So, total variable costs are $18,000. Therefore, total costs are: 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 each month.

Q 3

What is the essence of using breakeven analysis for multiple services and/or multiple prices?

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Essay

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.

Q 4

Elite Hospital has $400,000 of fixed overhead costs. It has the following three types of patients: When Elite Hospital plans its new marketing campaign, what type of patient should they try to attract, assuming: a) They are not near capacity in any area. b) They are nearly full and can take a limited number of additional patient-days. c) They have plenty of beds but are running out of operating room time.

Essay

Q 5

When a health care organization tries to determine what type of patients it should attempt to attract, what is the most critical financial measure that should be considered?

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Q 6

(Note: This problem has been adapted from an earlier problem presented by Horngren,* which came originally from a CPA exam.) Aspen Hospital allocates overhead costs to departments such as pediatrics, maternity, psychiatric, and so forth. Aspen charges each separate department for common services such as meals and laundry and for administrative services such as billings and collections. For the year ended June 30, 2007, the operating room department at Aspen Hospital charged each patient an average of $1,650 per operation and had revenue of $2,656,500. Expenses charged by the hospital to the operating room department for the year ended June 30,2007, were as follows: The only personnel directly employed by the operating room are supervising nurses, scrub nurses, and circulating nurses. The hospital has minimum personnel requirements based on total operations. Hospital requirements beginning at the minimum expected level of operations follow: The staffing levels above represent fulltime equivalents, and it should be assumed that the operating room always employs only the minimum number of required fulltime equivalent personnel. Annual salaries for each class of employee follow: supervising nurses, $68,500; scrub nurses, $59,000; and circulating nurses, $54,000. The operating room has capacity for only 2,000 operations per year at the current time. Calculate the minimum number of operations required for the operating room to break even for the year ending June 30, 2008. Patient demand is unknown, but assume that revenue per operation and costs remain at the same rates as last year.

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Q 7

Why is volume considered to be critical for any new venture?

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Q 8

Your Eastlawn Surgery Center is considering adding a new service, which encompasses several types of patients. If you add the service, you will get patients in each of several types for which you do not currently have any admissions. You are given the following data: There will be no fixed cost specifically associated with any one of the three new types of patients. The fixed costs for the new service that makes up these three types will be $25,000. The joint overhead costs of the surgery center are $500,000, currently being allocated to the surgery c en te r's three existing services. How many admissions in each of the new types of patients will be needed to break even on the new service?

Essay

Q 9

True or false: It is essential that breakeven analysis always consider all costs related to a program or service, including the joint costs.

True False

Q 10

Stellar Outpatient Clinic has the following patient mix: You want the clinic to earn a $100,000 profit this year. What breakeven volume is necessary for this to occur?

Essay

Q 11

True or false: As long as the revenue per patient is at least equal to the variable cost per patient, the service or program will break even.

True False

Q 12

True or false: Average costs fall as volume rises, as a result of fixed costs.

True False

Quiz 6: Cost-Volume-Proﬁt Analysis

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