Week 4 Homework

Chapter 7: 7-1, 7-2, 7-3, & 7-4

Chapter 8: 8-1, 8-2, 8-3, & 8-4

7.1

Assume that the managers of FortWinstonHospital 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

Annual overhead allocation$ 50,000
Expected annual utilization10,000

  1. What per-visit price must be set for the service to break even? To earn an annual profit of $100,000?
  2. Repeat Part a, but assume that the variable cost per visit is $10.
  3. Return to the data given in the problem. Again repeat Part a, but
    assume that direct fixed costs are $1,000,000.
  4. Repeat Part a assuming both $10 in variable cost and $1,000,000 in direct fixed costs.

7.2

The audiology department at Randall Clinic offers many services to the clinic's patients. The three most common, along with cost and utilization data, are as follows:

ServiceVariable Cost Annual DirectAnnual # Visits

per Service Fixed Costs

Basic exam $5 $50,000 3,000

Advanced examination $7 $30,000 1,500

Therapy session $10 $40,000 500

  1. What is the fee schedule for these services, assuming that the goal is
    to cover only variable and direct fixed costs?
  2. Assume that the audiology department is allocated $100,000 in
    total overhead by the clinic, and the department director has al
    located $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.)
  3. 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.)

7.3

Allied Laboratories is combining some of its most common tests intoone-price packages. One such package will contain three tests thathave the following variable costs:

Test ATest BTest C

Disposable syringe$3.00 $3.00 $3.00

Blood vial0.50 0.50 0.50

Forms0.15 0.15 0.15

Reagents0.80 0.60 1.20

Sterile bandage0.10 0.10 0.10

Breakage/losses0.05 0.05 0.05

When the tests are combined, only one syringe, form, and sterile bandage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vials are required, and reagent costs will remain the same (reagents from all three tests are required).

  1. As a starting point, what is the price of the combined test assuming
    marginal cost pricing?
  2. Assume that Allied wants a contribution margin of $10 per test.
    What price must be set to achieve this goal?
  3. Allied estimates that 2,000 of the combined tests will be conducted during the first year. The annual allocation of direct fixed and
    overhead costs total $40,000. What price must be set to cover full
    costs? What price must be set to produce a profit of $20,000 on thecombined test?

7.4

Assume that Valley ForgeHospital has only the following three payer groups:

Number ofAverage RevenueVariable Cost

Payer Admissionsper Admissionper Admission

PennCare 1,000 $5,000 $3,000

Medicare 4,000 4,500 4,000

Commercial 8,000 7,000 2,500

The hospital's fixed costs are $38 million,

  1. What is the hospital's net income?
  2. Assume that half of the 100.000 covered lives in the commercialpayer group will be moved into a capitated plan. All utilization and cost data remain the same. What PMPM rate will the hospital have to charge to retain its Part a net income?
  3. What overall net income would be produced if the admission rate
    of the capitated group were reduced from the commercial level by
    10 percent?
  4. Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admissionfor the capitated group were lowered to $2,200?

8.1

Consider the following 2011 data for Newark GeneralHospital (in millions of dollars):

StaticFlexibleActual

BudgetBudgetResults

Revenues$4.7$4.8$4.5

Costs4.14.14.2

Profits0.60.70.3

  1. Calculate and interpret the profit variance.
  2. Calculate and interpret the revenue variance.
  3. Calculate and interpret the cost variance.
  4. Calculate and interpret the volume and price variances on the revenue side.
  5. Calculate and interpret the volume and management variances on thecost side.
  6. How are the variances calculated above related?

8.2

Here are the 2011 revenues for the Wendover Group Practice Association for four different budgets (in thousands of dollars):

FlexibleFlexible

StaticEnrollment/Utilization)(Enrollment)Actual

BudgetBudgetBudgetResults

$425$200$180$300

  1. What does the budget data tell you about the nature of Wendover'spatients: Are they capitated or fee-for-service? (Hint: See the note to
    Exhibit 8.7.)
  2. Calculate and interpret the following variances:

•Revenue variance

•Volume variance

•Price variance

•Enrollment variance

8.3 Here are the budgets of BrandonSurgeryCenter for the most recent historical quarter (in thousands of dollars):

Static Flexible Actual

Number of surgeries 1,200 1,3001,300

Patient revenue $2,400 $2,600$2,535

Salary expense 1,200 1,3001,365

Non-salary expense 600 650585

Profit $600 $650$585

The center assumes that all revenues and costs are variable and hence tied directly to patient volume.

  1. Explain how each amount in the flexible budget was calculated. (Hint
    Examine the static budget to determine the relationship of each bud
    get line to volume.)
  1. Determine the variances for each line of the profit and loss statement,
    both in dollar terms and in percentage terms. (Hint: Each line has a total variance, a volume variance, and a price variance [for revenues
    and management variance [for expenses].)
  1. What do the Part b results tell Brandon's managers about the surgerycenter's operations for the quarter?

8.4

Refer to Carroll Clinic's 2011 operating budget contained in Exhibit 8.3, Instead of the actual results reported in Exhibit 8.4, assume the results reported below:

Carroll Clinic: New 2011 Results

/. Volume:

A. FFS34,000 visits

B.Capitated lives30,000 members
Number of member-months360,000

Actual utilization per

member-month0.12

Number of visits43,200 visits

C.Total actual visits77,200 visits

II. Revenues:

A.FFS$28 per visit

X 34,000 actual visits $ 952,000

B.Capitated lives$2.75 PMPM

X 360,000 actual member-months $ 990,000

C.Total actual revenues$1,942,000

III. Costs:

A. Variable Costs:

Labor$1,242,000 (46,000 hours at $27/hour)

Supplies126,000 (90,000 units at $1.40/unit)

Total variable costs$17.72 ($1,368,000 / 77,200)

B. Fixed Costs

Overhead, plant,

and equipment$525,000

C. Total actual costs$1,893,000

IV. Profit & Loss Statement:

Revenues:

FFS$952,000

Capitated$990,000

Total$1,942,000

Costs:

Variable:

FFS$602,487

Capitated765,513

Total$1,368,000

Contribution Margin$574,000

Fixed Costs525,000

Actual profit$49,000

  1. Construct Carroll’s flexible budget for 2011.
  1. What are the profit variance, revenue variance, and cost variance?
  1. Consider the revenue variance. What is the component volume variance? The price variance?
  1. Break down the cost variance into volume and management components.
  1. Break down the management variance into labor, supplies, and fixed cost variances.
  1. Interpret your results. In particular, focus on the differences between the variance analysis here and the Carroll Clinic illustration presented in the chapter.