I don’t understand this Management question and need help to study.
Grandview Clinic has fixed costs of $2 million and an average variable cost rate of $15 per visit. Its sole payer, an HMO, has proposed an annual capitation payment of $150 for each of its 20,000 members. Past experience indicates the population served will average two visits per year.
a. Construct the base case projected P&L statement on the contract.
b. Sketch two CVP analysis graphs for the clinic—one with number of visits on the x -axis and one with number of members on the x -axis.
c. What is the clinic’s contribution margin on the contract?
d. What profit gain can be realized if the clinic can lower per member utilization to 1.8 visits?
2. Charity Hospital, a not-for -profit, has a maximum capacity of 15,000 discharges per year. Variable patient service costs are $495 per discharge. Variable general and administrative costs are $5 per discharge. Fixed hospital overhead costs are $4,000,000 per year. The current reimbursement rate is $1,000 per discharge.
a. What is Charity’s breakeven volume in number of discharges?
b. Now assume Charity’s total discharges for 2014 totaled 10,000. In late 2014, a specialty cardiac hospital opened near Charity, so that discharges in 2015 will reach only 8,500. Management is planning to cut fixed costs so that the total for 2015 will be $1,000,000 less than in 2014. Management is also considering reducing variable staffing costs in order to earn a target profit that will be the same dollar amount as the profit earned in 2014. Charity has already had 4,000 discharges in 2015 at a reimbursement rate of $1,000 per discharge with variable costs unchanged. What contribution margin per unit is needed on the remaining 4,500 discharges in order to reach the target profit?
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