Question

Page 149 5.1 End of Chapter Problems Assume that the managers of the Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates: Variable Cost Per Visit $5.00 Annual Direct fixed Cost $500,000 Annual overhead allocation $50,000 Expected annual utilization 10,000 visits a. What per visit price must be set for the service to break-even? To earn an annual profit of $100,000?

Answer 1

Break even = $50 per visit

$100,000 profit = $60 per visit

Step-by-step explanation:

In order to break even, the total revenue of the expected 10,000 visits must equal the costs necessary to perform them. The cost per visit is the only variable cost with the others being fixed costs:

`10,000*P = 10,000*5 + 50,000+500,000\\P-5 = (550,000)/(10,000)\\P=\$50`

In order to break even, the hospital must charge $50 per visit.

In order to earn an annual profit of 100,000, That profit must be spread out over the 10,000 visits, the profit required per visit is:

`P_v = (100,000)/(10,000)\\P_v = \$10`

Since the break even price is $50, the hospital must charge $60 to earn an annual profit of $100,000.