A dermatology clinic expects to contract with an HMO for an estimated 80,000 enr

Question

A dermatology clinic expects to contract with an HMO for an estimated 80,000 enrollees. The HMO expects one in four of its enrolled members to use the dermatology services per month. At the end of the year, the dermatology clinic's business manager looked at her monthly figures and saw that the number of enrolled members had increased by 5% over the budgeted amount, and that one in three of the total HMO members had used the dermatology services per month. Net monthly revenues of the dermatology clinic were budgeted at $260,000 but were actually $450,000. Monthly expenses for the clinic were budgeted at $200,000 but were actually $270,000. Prepare a monthly revenue, expense, and net income variance budget for the clinic. Are these variances favorable or unfavorable? Why? Show calculations.

Explanation / Answer

Budgeted Actual Variance Rating Enrollees 80000 84000 4000 Favorable Dermatology services 20000 28000 8000 Favorable Monthly revenues $260,000 $450,000 $190,000 Favorable Monthly expenses $200,000 $270,000 $70,000 Favorable Working: Estimated enrollees 80000 Estimated dermatology services (80000*1/4) 20000 Monthly revenue estimated $260,000 Monthly expenses budgeted $200,000 Actual enrollees (80000*104%) 84000 Actual dermatology services (84000/3) 28000 Actual monthly revenue $450,000 Actual monthly expenses $270,000 Estimated enrollees 80000 Estimated dermatology services (80000*1/4) 20000 Monthly revenue estimated $260,000 Monthly expenses budgeted $200,000 Actual enrollees (80000*104%) 84000 Actual dermatology services (84000/3) 28000 Actual monthly revenue $450,000 Actual monthly expenses $270,000 Reasons: Enrollees are increased to 84000, there a chance to increase firm profitabiliy with this enrollees, so it is Favorable. Dermatology services increased to 28000, with increasing services levels we can get more profits than previous so it is also Favorable to firm. Monthly revenues increased to $450000: Monthly revenues: Budgeted revenues = $260,000 Budgeted revenue per service = 260000/20000 Budgeted revenue per service = $13 Actual revenue = $450,000 Actual revenue per service = 450000/28000 = $16 As per budget monthly revenue per service is only $13, but actually service revenue per service is $16 so it is Favorable. Monthly expenses increased to $270000: Monthly expenses: Budgeted expenses = $200,000 Budgeted expense per service = 200000/20000 = $10 Actual expenses = $270,000 Actual expense per service = 270000/28000 = $9.64 Monthly expenses increased to $270000, but per service cost is decreased from $10 to $9.64 so it is also favorable condition to the firm. Thank you... Budgeted Actual Variance Rating Enrollees 80000 84000 4000 Favorable Dermatology services 20000 28000 8000 Favorable Monthly revenues $260,000 $450,000 $190,000 Favorable Monthly expenses $200,000 $270,000 $70,000 Favorable

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