Breakeven Analysis SETTING PRICES ON INDIVIDUAL SERVICES VALUES NEW SERVICE: PRI

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Breakeven Analysis SETTING PRICES ON INDIVIDUAL SERVICES VALUES NEW SERVICE: PRIMARY CARE OFFICE EXTENSION PROJECTED DATA: VARIABLE COST PER VISIT $17 ANNUAL DIRECT FIXED COST $138,000 ANNUAL OVERHEAD ALLOCATION $41,000 NUMBER OF VISITS 5,950 WHAT PRICE MUST BE SET TO ACHIEVE BREAKEVEN POINT? WHAT PRICE MUST BE SET TO ACHIEVE $30,000 PROFIT? Service Line Deletion Assume contribution margin was consistent for each product for the past three years. Numbers are in thousands Radiology OBGYN Surgery Trauma Rehab Service Description Total Revenue    Scranton $1,400 $1,200 $2,300 $4,500 $1,200 $10,600    Wilkes Barre 575 900 1,500 1,000 2,300 6,275 Total Revenue $1,975 $2,100 $3,800 $5,500 $3,500 $16,875 Variable Costs Flex Labor $400 $400 $1,200 $3,500 $900 $6,400 Costs of Goods sold 500 650 700 1,600 1,400 4,850 Supplies 100 60 100 1,200 800 2,260 Total Variable Cost $1,000 $1,110 $2,000 $6,300 $3,100 $13,510 Contribution Margin $975 $990 $1,800 $(800) $400 $3,365 Fixed Costs $450 $325 $475 $500 $450 $2,200 Net Income/Loss $525 $665 $1,325 $(1,300) $(50) $1,165 1) Assuming fixed costs remain constant for a three (3) year period, decide on which servicet you would delete (if any) to increase profit margin (net income) 2) Based on your determiniation, delete the service(s) you decided on, equally distribute the fixed costs to the other service line that you have maintained, and calculate the new profit. 3) What other critical review needs to be considered before deleting a service line even though the contribution margin may be negative Breakeven Analysis SETTING PRICES ON INDIVIDUAL SERVICES VALUES NEW SERVICE: PRIMARY CARE OFFICE EXTENSION PROJECTED DATA: VARIABLE COST PER VISIT $17 ANNUAL DIRECT FIXED COST $138,000 ANNUAL OVERHEAD ALLOCATION $41,000 NUMBER OF VISITS 5,950 WHAT PRICE MUST BE SET TO ACHIEVE BREAKEVEN POINT? WHAT PRICE MUST BE SET TO ACHIEVE $30,000 PROFIT? Service Line Deletion Assume contribution margin was consistent for each product for the past three years. Numbers are in thousands Radiology OBGYN Surgery Trauma Rehab Service Description Total Revenue    Scranton $1,400 $1,200 $2,300 $4,500 $1,200 $10,600    Wilkes Barre 575 900 1,500 1,000 2,300 6,275 Total Revenue $1,975 $2,100 $3,800 $5,500 $3,500 $16,875 Variable Costs Flex Labor $400 $400 $1,200 $3,500 $900 $6,400 Costs of Goods sold 500 650 700 1,600 1,400 4,850 Supplies 100 60 100 1,200 800 2,260 Total Variable Cost $1,000 $1,110 $2,000 $6,300 $3,100 $13,510 Contribution Margin $975 $990 $1,800 $(800) $400 $3,365 Fixed Costs $450 $325 $475 $500 $450 $2,200 Net Income/Loss $525 $665 $1,325 $(1,300) $(50) $1,165 1) Assuming fixed costs remain constant for a three (3) year period, decide on which servicet you would delete (if any) to increase profit margin (net income) 2) Based on your determiniation, delete the service(s) you decided on, equally distribute the fixed costs to the other service line that you have maintained, and calculate the new profit. 3) What other critical review needs to be considered before deleting a service line even though the contribution margin may be negative

Explanation / Answer

1) Assuming fixed costs remain constant for a three (3) year period, decide on which service you would delete (if any) to increase profit margin (net income)

The service may be terminated on the basis of contribution margin as the trauma is giving a negative contribution margin of -800 therefore it should be terminated to increase net income

2) Based on your determination, delete the service(s) you decided on, equally distribute the fixed costs to the other service line that you have maintained, and calculate the new profit.

The new net profit will be = 1165 +800 = 1965 if trauma service is terminated

It may also be calculated as follows

                                    Radiology         OBGYN Surgery Rehab Service            Total

Contribution margin     $975                $990    $1,800           $400                $4165

Less fixed cost                                                                                                 -2200

Net profit will be                                                                                               1965

3) What other critical review needs to be considered before deleting a service line even though the contribution margin may be negative

Sometime some product or services are leading and they are to be provided despite of loss, because it is it not provided, it will have impact on revenues of other services as well.

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