Q. Consider a sister community hospital in Dammam defines its output or volume a
ID: 2469498 • Letter: Q
Question
Q. Consider a sister community hospital in Dammam defines its output or volume as a visit. Assume the hospital has the following financial information: Fixed cost = $ 300,000 Total visits = 7,000 Unit cost per visit = $25 Total revenue = $ 700,000
a) Calculate the revenue rate (average revenue per visit) for the hospital?
b) Calculate the variable cost for the hospital?
c) Calculate the total cost for the hospital?
d) What is the total contribution margin?
e) Is there a profit made? If yes, calculate profit?
f) If the visits reduce to 4,000 visits, how would that change the hospital profit?
g) If the volume (visits) increases to 6,000 visits, how would that change the hospital profit?
h) Explain the changes realized in scenarios (f) and (g) above in terms of either fees-for-service or capitation?
Explanation / Answer
a) Calculate the revenue rate (average revenue per visit) for the hospital:
Average revenue per visit = $700,000 /7,000 visits
= $100 per visit.
b) Calculate the variable cost for the hospital:
Total Variable cost = 7,000 visits * $25
= $175,000
c) Calculate the total cost for the hospital:
Total cost = Fixed cost + Variable cost
= $300,000 + $175,000
= $475,000
d) Calculate the total contribution margin:
= Number of visits * (Service revenue – variable cost)
= 7,000 * ($100- $25)
= $525,000
e) Calculate the profit made? If yes, calculate profit:
Details
Amount
Service revenue
$ 700,000
Less: variable cost
$ 175,000
Contribution
$ 525,000
Less: Fixed cost
$ 300,000
Profit
$ 225,000
f) Calculate the visits reduce to 4,000 visits, how that would change the hospital profit:
Details
Amount
Service revenue (4,000 *$100)
$ 400,000
Less: variable cost (4,000 *$25)
$ 100,000
Contribution
$ 300,000
Less: Fixed cost
$ 300,000
Profit
$ -
There is no profit no loss.
g) Calculate the volume (visits) increases to 6,000 visits, how would that change the hospital profit:
Details
Amount
Service revenue (6,000 *$100)
$ 600,000
Less: variable cost (6,000 *$25)
$ 150,000
Contribution
$ 450,000
Less: Fixed cost
$ 300,000
Profit
$ 150,000
Therefore, the profit would be $150,000.
Details
Amount
Service revenue
$ 700,000
Less: variable cost
$ 175,000
Contribution
$ 525,000
Less: Fixed cost
$ 300,000
Profit
$ 225,000
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