Parkland Hospital provides comprehensive physical exams. The charge per exam is
ID: 2399483 • Letter: P
Question
Parkland Hospital provides comprehensive physical exams. The charge per exam is $100 while the variable cost per exam is $65. Forty percent of patients who come in for exams are private pay. The must pay the full charge. An insurance company has an agreement with the hospital that reduces the charge by 20 percent for six percent of the patients. The hospital has $230,000 in fixed cost per year.Q1. What is the weighted contribution margin ?
Q2. How many exams must parkland hospital provide in order to break even ? Parkland Hospital provides comprehensive physical exams. The charge per exam is $100 while the variable cost per exam is $65. Forty percent of patients who come in for exams are private pay. The must pay the full charge. An insurance company has an agreement with the hospital that reduces the charge by 20 percent for six percent of the patients. The hospital has $230,000 in fixed cost per year.
Q1. What is the weighted contribution margin ?
Q2. How many exams must parkland hospital provide in order to break even ?
Q1. What is the weighted contribution margin ?
Q2. How many exams must parkland hospital provide in order to break even ?
Explanation / Answer
Solution 1:
Regular charge per exam = $100
Variable cost per exam = $65
Regular contribution margin per exam = $100 - $65 = $35 per exam
Charge as per agreement with insurnce company = $100 - $100*20% = $80
Contribution margin for 60% patients (Special customer) = $80 - $65 = $15 per exam
Weighted average contribution margin per exam = ($35 * 40%) + ($15 * 60%) = $23 per exam
Solution 2:
Annual fixed costs = $230,000
Nos of exams parkland hospital must provide in order to breakeven = Fixed costs / Weighted average contribution margin per unit
= $230,000 / $23 = 10000 exams.