7.2 Assume that the managers of Fort Winston Hospital are setting the price on a

Question

7.2 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: 500,00 Annual overhead allocation: 50,000 Expected annual utilization: 10,000 a. What per-visit price must be set for the service to break even? To earn an annual profit of $100,000? b. Repeat Part a, but assume tht the variable cost per visit is $10. c. Return to the data given in the problem. Again repeat part a, but assume that direct fixed costs are $1,000,000. d. Repeat Part a assuming both $10 in variable cost and $1,000,000 in direct fixed costs.

Explanation / Answer

10,000(visits) x $ 5.00(variable cost per visit) = $50,000. $ 500,000 (direct fixed cost) + $50,000 (overhead allocation) = $550,000. $550,000 + $ 50,000(utilization amount) = $600,000 total. $600,000 divided by 10,000 (visits) = $ 60 per visits to break even. In order to make a profit of $100,000.... $600,000 (total) + $100,000 (needed profit) + $700,000 $700,000 divided by the 10,000 (visits) = $ 70 per visit in order to make the $100,000. profit.

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