# HSA 525 Week 3 Homework

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5.1

Consider the CVP graphs below for two providers operating in a fee-for-service environment: see attached file

a. Assuming the graphs are drawn to the same scale, which provider has the greater fixed costs? The greater variable cost rate? The greater per unit revenue?

b.Which provider has the greater contribution margin?

c.Which provider needs the higher volume to break even?

d. How would the graphs change if the providers were operating in a discounted fee-for-service environment? In a capitalized environment?

5.3

Assume that a radiologist group practice has the following cost structure:

Fixed Costs:                \$500,000
Variable Cost per procedure:         \$25
Charge (revenue) per procedure:    \$100

Furthermore, assume that the group expects to perform 7,500 procedures in the coming year.

a.    Construct the group’s base case projected P&L statement.

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

c.    What volume is required to provide a pretax profit of \$100,000? A pretax profit of \$200,000?

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

5.4

General Hospital, a not-for-profit acute care facility, has the following cost structure for its inpatient services:

Fixed Costs:                \$10,000,000
Variable cost per inpatient day:        \$200
Charge (revenue) per inpatient day:    \$1,000

The hospital expects to have a patient load of 15,000 inpatient days next year.

a.    Construct the hospital’s base case projected P&L statement.

b.    What is the hospital’s breakeven point?

c.    What volume is required to provide a profit of \$1,000,000? A profit of \$500,000?

d.    Now assume that 20 percent of the hospital’s inpatient days come from a managed care plan that wants a 25 percent discount from charges. Should the hospital agree to the discounted proposal?

5.5

You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows:

Revenues:            \$400,000
Wages & Benefits:        \$220,000
Rent:                \$5,000
Depreciation:            \$30,000
Utilities:                \$2,500
Medical Supplies:        \$50,000

Assume that all costs are fixed, except supply costs, which are variable. Furthermore, assume that the clinic must pay taxes at a 20 percent rate.

a.    Construct the clinic’s projected P&L statement.

b.    What number of visits is required to break even?

c.    What number of visits is required to provide you with an after-tax profit of \$100,000?

CONTINUED UP TO NO. 6.4

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