Methodist Medical Center (MMC) offers inpatient critical care and is currently p

Question

Methodist Medical Center (MMC) offers inpatient critical care and is currently partnered with an insurance company to take care of 15,000 members. The insurance company is reimbursing MMC by fee-for-service and the average reimbursement rate is $10,000 per admission. Financial information of MMC is as the following:

Average revenue per admission        = $     10,000.

Average variable cost per admission = $       4,000.

Direct fixed cost or overhead           = $9,000,000.

1. What’s the break-even volume of MMC?

2. MMC offered service to 1,800 patients last year to members covered by this insurance company. At this service volume, how much is the degree of operating leverage?

Explanation / Answer

1)

Breakeven = Fixed cost/Contribution margin

2)

Revenue $       10,000.00 Variable cost $          4,000.00 Contribution Margin $          6,000.00 Fixed cost $ 90,00,000.00 Breakeven 1500

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