Scribd
Upload
72 views9 pages

Questions & Problems 2

The document provides information to allocate housekeeping costs of $100,000 across three patient service departments using either revenue or hours of housekeeping services as the cost driver. Using revenue results in allocations of $60,000, $30,000, and $10,000 respectively, while using hours results in allocations of $30,000, $60,000, and $10,000 with the hours driver considered better because it better reflects department use of housekeeping services.

Uploaded by

Suman Mahmood
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
72 views9 pages

Questions & Problems 2

The document provides information to allocate housekeeping costs of $100,000 across three patient service departments using either revenue or hours of housekeeping services as the cost driver. Using revenue results in allocations of $60,000, $30,000, and $10,000 respectively, while using hours results in allocations of $30,000, $60,000, and $10,000 with the hours driver considered better because it better reflects department use of housekeeping services.

Uploaded by

Suman Mahmood
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
You are on page 1/ 9

Problem 5.

3
a. Construct the group’s base case projected P&L statement
Total revenues (100*7500) 750000
Total variable costs (25*7500) 187500
Total contribution margin 562500
Fixed costs 500000
Profit (net income) 62500

b. What is the group’s contribution margin? What is its breakeven point?


The group’s contribution margin is $562,500. The breakeven point is 6,667.
($100xvolume)- (25xvolume)-500000= 0
500000 = ($100xvolume)- (25xvolume)
75x volume=500000
500000/75= 6,667

c. What volume is required to provide a pretax profit of $100,000? A pretax profit of


$200,000?
(Fixed Costs + Specified Profit) / Contribution Margin per unit
(500000 + 100000)/75
600000/75= 8,000
(500000 + 200000)/75
700000/75= 9,333

d. Sketch out a CVP analysis graph depicting the base case situation.

e. Now assume that the practice contracts with one HMO, and the plan proposes a 20
percent discount from charges. Redo questions a, b, c, and d under these conditions
a. Construct the group’s base case projected P & L statement.
Total revenues (80*7500) 600000
Total variable costs (25*7500) 187500
Total contribution margin 412500
Fixed costs 500000
Profit (net income): 87500

b.What is the group’s contribution margin? What is its breakeven point?


The group’s contribution margin is $412,500. The breakeven point is 9,091.
($80xvolume)- (25xvolume)-500000= 0
500000=($80xvolume)- (25xvolume)
55x volume=500000
500000/55= 9,091

c.What volume is required to provide a pretax profit of $100,000? A pretax profit of


$200,000?
> (Fixed Costs + Specified Profit) / Contribution Margin per unit
(500000 + 100000)/55
cvp graph
0 1 1000 2000 4000
revenue 0 100 10000 200000 400000

variable cost 0 25 25000 50000 100000


gross profit 0 75 75000
fixed cost 500000 500000 500000 500000 500000
net income -500000 -499925 -425000 -350000 -200000

d.
Base Case S5.ituation
1000000
800000
600000
400000
200000
0
0 1 1000 2000 4000 6000 7000 7500
-200000
-400000
-600000

revenue variable cost gross profit


fixed cost net income
6000 7000 7500
600000 700000 750000

150000 175000 187500


562500
500000 500000 500000
-50000 25000 62500

7000 7500

profit
You are considering starting a walk-in clinic. Your financial projections for the first year of
operations are as follows: Revenues (10,000 visits) $400,000 Wages and benefits 220,000
Rent 5,000 Depreciation 30,000 Utilities 2,500 Medical supplies 50,000 Administrative
supplies 10,000 Assume that all costs ar e fixed, except supply costs, which are vari- able.
Furthermore, assume that the clinic must pay taxes at a 30 per - cent rate.
a. Construct the clinic’s projected P&L statement.

b. What number of visits is r equired to break even?

c. What number of visits is r equired to provide you with an after-tax profit of


$100,000?
a. Revenues $400,000.00 $40.00 given
less variable costs $600,000.00 $6.00 meidcal supplies + admin supplies
contribution margins $340,000.00 $34.00 revenues - variable costs
less fixed cost $257,500.00 wages/benefits + rent + repriciation + utilities
profit before taxes $82,500.00 contribution margin - fixed cost
less taxes $24,750.00 30% tax
profit after taxes $57,750.00

b. break even point 7574 fixed cost / contribution margin per unit

c. profit before taxes $142,857.14 proft after tax/70%


target visit 11775 profit before tax + fixed cost) / contribution mar
s + admin supplies

+ rent + repriciation + utilities


argin - fixed cost

tribution margin per unit

x + fixed cost) / contribution margin per unit


The housekeeping ser vices department of Ruger Clinic, a multispecialty practice in Toledo,
Ohio, had $100,000 in direct costs during 2015. These costs must be allocated to Ruger’s
three revenue-producing patient services departments using the direct method. Two cost
drivers are under consideration: patient services revenue and hours of housekeeping services
used. The patient services departments generated $5 million in total revenues during 2015,
and to support these clinical activities, they used 5,000 hours of housekeeping services.
a. What is the value of the cost pool?
. The value of the cost pool is the total amount of direct costs attributable to the overhead
service. In this case, the value for housekeeping is $100,000.

b. What is the allocation rate if:


- patient services revenue is used as the cost driver?
If patient services revenue is used as the cost driver, allocation rate is $100,000 ÷
$5,000,000 = $0.02 per revenue dollar.

- hours of housekeeping ser vices is used as the cost driver


If hours of housekeeping services is used as the cost driver, the allocation rate is
$100,000 ÷ 5,000 = $20 per housekeeping hour.
a.

b
Refer to Problem 6.1. Assume that the three patient services departments are adult services,
pediatric services, and other services. The patient services revenue and hours of housekeeping
services for each department are as follows:

a. What is the dollar allocation to each patient ser vices department if patient services
revenue is used as the cost driver?
c.
b. What is the dollar allocation to each patient ser vices department if hours of
housekeeping support is used as the cost driver?

c. What is the dif ference in the allocation to each department between the two drivers?
d.
d. Which of the two drivers is better? Why?
revenues allocation rate allocation
adult servies $3,000,000.00 0.02 $60,000.00
pediatric services $1,500,000.00 0.02 $30,000.00
other services $500,000.00 0.02 $10,000.00
$5,000,000.00 $100,000.00

revenues allocation rate allocation


adult servies 1,500.00 20 $30,000.00
pediatric services 3,000.00 20 $60,000.00
other services 500.00 20 $10,000.00
5,000.00 $100,000.00

adult servies -30,000.00


pediatric services 30,000.00
other services 0.00

The number of hours is the better driver because it reflects the


relationship between the output of a patient services department and
its use of financial services in a better way. The use of housekeeping services
is linked to the number of hours consumed than to the amount ofrevenues
generated. The number of hours is better in terms of
fairness as well as cost control.

You might also like