Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are relevant data estimates: Variable cost per visit $ 5.00 Annual direct fixed costs $500,000...

Answer
Problem 7.1
a) What per-visit price must be set for the service to break even? To earn an
annual profit of $100,000?
In order to breakeven we have to keep profit = 0
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (10,000 * price) – (10,000 * $5) - $500,000 -$50,000
$600,000 = 10,000 * price
Price = $600,000 / 10,000 = $60
To earn a profit of $100,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
$100,000 = (10,000 * price) – (10,000 * $5) - $500,000 -$50,000
$700,000 = 10,000 * price
Price = $700,000 / 10,000 = $70
b) Repeat Part a, but assume that the variable cost per visit is $10.
In order to breakeven we have to keep profit = 0
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (10,000 * price) – (10,000 * $10) - $500,000 -$50,000
$650,000 = 10,000 * price
Price = $650,000 / 10,000 = $65
To earn a profit of $100,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
$100,000 = (10,000 * price) – (10,000 * $10) - $500,000 -$50,000
$750,000 = 10,000 * price
Price = $750,000 / 10,000 = $75
c) Return to the data given in the problem. Again repeat Part a, but
assume that direct fixed costs are $1,000,000.
In order to breakeven we have to keep profit = 0
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (10,000 * price) – (10,000 * $5) - $1,000,000 -$50,000
$1,100,000 = 10,000 * price
Price = $1,100,000 / 10,000 = $110
To earn a profit of $100,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
$100,000 = (10,000 * price) – (10,000 * $5) - $1,000,000 -$50,000
$1,200,000 = 10,000 * price
Price = $1,200,000 / 10,000 = $120
d) Repeat Part a assuming both $10 in variable cost and $1,000,000 in direct
fixed costs.
In order to breakeven we have to keep profit = 0
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (10,000 * price) – (10,000 * $10) - $1,000,000 -$50,000
$1,150,000 = 10,000 * price
Price = $1,150,000 / 10,000 = $115
To earn a profit of $100,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
$100,000 = (10,000 * price) – (10,000 * $10) - $1,000,000 -$50,000
$1,250,000 = 10,000 * price
Price = $1,250,000 / 10,000 = $125
Problem 7.2
a. What is the fee schedule for these services, assuming that the goal is
to cover only variable and direct fixed costs?
Basic examination
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (3,000 * price) – (3,000 * $5) - $50,000
$65,000 = 3,000 * price
Price = $65,000 / 3,000 = $21.67
Advanced examination
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (1,500 * price) – (1,500 * $7) - $30,000
$40,500 = 1,500 * price
Price = $40,500 / 1,500 = $27
Therapy Session
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (500 * price) – (500 * $10) - $40,000
$45,000 = 500 * price
Price = $45,000 / 500 = $90
b) Assume that the audiology department is allocated $100,000 in
total overhead by the clinic, and the department director has allocated $50.000 of
this amount to the three services listed above. What is the fee schedule assuming
that these overhead costs must be covered? (To answer this question, assume
that the allocation of overhead costs to each service is made on the basis of
number of visits.)
Overheads must be allocated and each service will be allocated its proportional share of
overheads of $50,000 based on 5,000 total visits
Basic examination
Share of Overheads = (3,000 /5, 000) * 50,000 =$30,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (3,000 * price) – (3,000 * $5) - $50,000 -$30,000
$95,000 = 3,000 * price
Price = $95,000 / 3,000 = $31.67
Advanced examination
Share of Overheads = (1,500 /5, 000) * 50,000 =$15,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (1,500 * price) – (1,500 * $7) - $30,000 - $15,000
$55,500 = 1,500 * price
Price = $55,500 / 1,500 = $37
Therapy Session
Share of Overheads = (500 /5, 000) * 50,000 =$5,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
0 = (500 * price) – (500 * $10) - $40,000 - $5,000
$50,000 = 500 * price
Price = $50,000 / 500 = $100
c. Assume that these services must make a combined profit of $25,000. Now what
is the fee schedule? (To answer this question, assume that the profit
requirement is allocated in the same way as overhead costs.)

Basic examination
Share of profit = (3,000 /5, 000) * 25,000 =$15,000
Profit = (Units * price) – (units * V.C) – Fixed Cost
$15,000 = (3,000 * price) – (3,000 * $5) - $50,000 -$30,000
$110,000 = 3,000 * price
Price = $110,000 / 3,000 = $36.67
Advanced examination
Share of profit= (1,500 /5, 000) * 25,000 =$7, 5 00
Profit = (Units * price) – (units * V.C) – Fixed Cost
$7,500 = (1,500 * price) – (1,500 * $7) - $30,000 - $15,000
$63,000 = 1,500 * price
Price = $63,000 / 1,500 = $42
Therapy Session
Share of profit = (500 /5, 000) * 25,000 =$2,500
Profit = (Units * price) – (units * V.C) – Fixed Cost
$2,500 = (500 *...