What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10 percent?

7.1 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

Annual overhead allocation $ 50,000 Expected annual utilization 10,000

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

Service Variable Cost Annual Direct Annual # 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

What is the fee schedule for these services, assuming that the goal is to cover only variable and direct fixed costs?
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.)
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.) lied Laboratories is combining some of its most common
7.3 Allied Laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs:

Test A Test B Test C

Disposable syringe $3.00 $3.00 $3.00

Blood vial 0.50 0.50 0.50

Forms 0.15 0.15 0.15

Reagents 0.80 0.60 1.20

Sterile bandage 0.10 0.10 0.10

Breakage/losses 0.05 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).

As a starting point, what is the price of the combined test assuming marginal cost pricing?
Assume that Allied wants a contribution margin of $10 per test. What price must be set to achieve this goal?
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 the combined test?
7.4 Assume that Valley Forge Hospital has only the following three payer groups:

Number of Average Revenue Variable Cost

Payer Admissions per Admission per 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,

What is the hospital”s net income?
Assume that half of the 100.000 covered lives in the commercial payer 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?
What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10 percent?
Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for the capitated group were lowered to $2,200?
8.1 Consider the following 2011 data for Newark General Hospital (in millions of dollars):

Static Flexible Actual

Budget Budget Results

Revenues $4.7 $4.8 $4.5

Costs 4.1 4.1 4.2

Profits 0.6 0.7 0.3

a. Calculate and interpret the profit variance.

b. Calculate and interpret the revenue variance.

c. Calculate and interpret the cost variance.

d. Calculate and interpret the volume and price variances on the revenue side.

e. Calculate and interpret the volume and management variances on the cost side.

f. 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):

Flexible Flexible

Static Enrollment/Utilization) (Enrollment) Actual

Budget Budget Budget Results

$425 $200 $180 $300

a. What does the budget data tell you about the nature of Wendover”s patients: Are they capitated or fee-for-service? (Hint: See the note to Exhibit 8.7.)

b. Calculate and interpret the following variances:

• Revenue variance

• Volume variance

• Price variance

• Enrollment variance

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

Static Flexible Actual

Number of surgeries 1,200 1,300 1,300

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

Salary expense 1,200 1,300 1,365

Non-salary expense 600 650 585

Profit $600 $650 $585

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

a. 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.)

b. Determine the variances for each line of the profit and loss statement, both in dollar terms and in percentage terms. (Hint: Each line has atotal variance, a volume variance, and a price variance [for revenues and management variance [for expenses].)

c. What do the Part b results tell Brandon”s managers about the surgery center”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. FFS 34,000 visits

B. Capitated lives 30,000 members Number of member-months 360,000

Actual utilization per

member-month 0.12

Number of visits 43,200 visits

C. Total actual visits 77,200 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)

Supplies 126,000 (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

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