Can you please show me step-by-step for this? Assume that managers of QVC Hospit
ID: 445492 • Letter: C
Question
Can you please show me step-by-step for this?
Assume that managers of QVC Hospital are setting the price on a new outpatient service. Here are relevant data estimates:
Variable cost per visit $25.00
Annual Direct Fixed Costs $750,000
Annual Overhead Allocation $275,000
Expected Annual Utilization 20,000 visits
What per visit price must be set for the service to breakeven? To earn an annual profit of $100,000?
Repeat Part a, but assume that the variable cost per visit is $27.
Return to the original data given in the problem. Again repeat Part a, but assume that direct fixed costs are $800,000.
Repeat Part a assuming both a $27 variable cost and $800,000 in direct fixed costs.
Explanation / Answer
Variable cost per visit $25.00
Annual Direct Fixed Costs $750,000
Annual Overhead Allocation $275,000
Expected Annual Utilization 20,000 visits
a. Case 1 : To Breakeven, the total costs should be equal to the total revenue generated. Let us assume that to achieve breakeven, price should be set as x.
Given, the above conditions,
25* 20,000 + 750000 + 275000 = 20000x
500000+750000+275000 = 20000x
1525000/20000 = x
Therefore, x = $76.25 per visit. Hence, to breakeven, the price should be $76.25
Case 2 : To earn an annual profit of $100,000
Profit = Revenue- Costs.
Let us assume, the per visit price to be y
Therefore, $1,00,000 = 20,000y - 1525000
=> 1625000/20000 = y
=>$ 81.25
Hence, in this case, the cost per visit should be $81.25
b. If variable cost per visit is $27,
Total Costs = 27* 20,000 + 750000 + 275000
= 5,40,000+7,50,000+2,75,000 = $1565000
To Breakeven,
1565000 = 20000x
Therefore, the price per visit should be $78.25
In order to earn a profit of $1,00,000
20,000y - 1565000 = 1,00,000
=>1665000/20000 = y
Therefore, y = 83.25. Hence, price per visit should be $83.25
c. If direct fixed costs are $800,000,
Then Price per vist at breakeven would be represented by :
500000+800000+275000 = 20000x
Therefore, 15,75,000/20000 = $78.75 per visit
To earn a profit of $ 1,00,000
20,000y - 1575000 = 1,00,000
16,75,000/20,000 = y
y = $ 83.75 per visit
d. In case of a $27 variable cost and $800,000 in direct fixed costs,
Price per unit in case of breakeven would be,
5,40,000+8,00,000+2,75,000 = 20,000x
16,15,000/20,000 = x
=>x = $80.75
In case of a profit of $1,00,000
20,000y- 5,40,000+8,00,000+2,75,000 = 1,00,000
17,15,000/20,000 = y
=>$ 85.75