The Fairman Care Center charges each patient $5. The center expects to have abou

ID: 2756088 • Letter: T

Question

The Fairman Care Center charges each patient $5. The center expects to have about 20,000 patient visits at the current $5 price. However, due to rising costs, the center has been forced to consider raising the charge to $6 or $7. If the prices go up, fewer people will come to the center for care. At the price of $6, only 18,000 patients are expected, and at the price of $7, there will be approximately 16,000 patients visiting the clinic.

Prepare a flexible budget for the Fairman Center at rates of $5, $6, and $7. The variable cost per patient is $4 and the fixed costs of operating the center are $32,000. What action do you recommend for the center? Why?

Explanation / Answer

Flexible budget for the Fairman Center:

Case-1

Case-2

Case-3

Charge per patient

$ 5

$ 6

$ 7

Patient visits

20000

18000

16000

Revenue (Patient visits * Charge per patient)

$ 100,000

$ 108,000

$ 112,000

Less: Variable costs (Patient visits * $4)

$ (80,000)

$ (72,000)

$ (64,000)

Less: Fixed Operating Costs

$ (32,000)

Net Operating Profits

$ (12,000)

$ 4,000

$ 16,000

Action:

It Is better to increase the charge per patient to $7 as it would result in highest profits.