Question

Assume that a radiologist group practice has the following cost structure: Fixed costs $549,976 Variable cost per procedure $26 Charge (revenue) per procedure $95 Furthermore, assume that the group expects to perform 7,467 procedures in the coming year. Also assume that the practice contracts with one HMO, and the plan proposes a 17 percent discount from charges. What volume is required to provide a pretax profit of $106,863?

Answer 1

To find the necessary volume of procedures for the radiologist group practice to earn a specific pretax profit, we must calculate the effective charge per procedure after a 17 percent discount and use the formula including fixed costs, desired profit, and the per-procedure costs.

Step-by-step explanation:

The question asks for the calculation of the volume of procedures required for a radiology group practice to achieve a specified pretax profit, given their cost structure and a proposed discount by a Health Maintenance Organization (HMO). To calculate the required volume, we use the formula: Volume = (Fixed Costs + Desired Profit) / (Charge per Procedure - Variable Cost per Procedure). However, given the 17 percent discount, the effective charge per procedure is 83 percent of the original price.

First, let's calculate the effective charge per procedure after the discount: Charge per Procedure = $95 × 0.83. Then we substitute the numbers into the volume formula mentioned earlier to find the required volume. We can compare this scenario to the provided SEO example where the center earns revenues of $20,000, and variable costs are $15,000, and determine whether the center should continue in business. Similarly, we can use this understanding to find the point at which the radiology group practice's revenues exceed their total costs to achieve the desired profit.