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.
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 circumstances.
Problem 5.7 Breakeven & Profit Behavior (Capitation)
Grandview Clinic has fixed costs of $2million and an average variable cost rate of $15 per visit. Its sole payer, an HMO, has proposed an annual capitation payment of $150 for each of its 20,000 members. Past experience indicates the population served will average two visits per year.
a. Construct the base case projected P&L statement on the contract.
b. Sketch two CVP analysis graphs for the clinic – one with number of visits on the X axis. Compare and contrast these graphs with the value in Problem 5.3.d?
c. What is the clinic’s contribution margin on the contract? How does this value compare with the value in Problem 5.3.b?
d. What profit gain can be realized if the clinic can lower per-member utilization to 1.8 visits?
Problem 5.3
a) The project P&L statement is shown below.
Particulars |
Amount |
Number of procedures |
7,500 |
Expected revenue |
750,000 |
(-)Cost of sales |
187,500 |
Gross profit |
562,500 |
(-)Fixed costs |
500,000 |
Profit before tax ($) |
62,500 |
b) Revenue per procedure = $ 100
Variable cost per procedure = $ 25
Hence contribution margin per procedure = 100-25 = $ 75
Total contribution margin for the group = 7500*75 = $562,500
Fixed cost = $500,000
Let the break even volume of procedures be X
Thus Fixed costs = Contribution margin *X
Hence 500000 = 75*X
Solving the above, we get X =6,667
c) Pretax profit desired = $ 100,000
Profit = Revenue – Fixed cost – Variable cost
Let the volume of procedures required for this profit level be X
Then 100000 = 75*X – 500000
Solving the above we, get X= 8000 units
Now Pretax profit desired = $ 200,000
Profit = Revenue – Fixed cost – Variable cost
Let the volume of procedures required for this profit level be Y
Then 200000 = 75*Y – 500000
Solving the above we, get Y= 9,334 units