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Cost-Volume-Profit Analysis in Health Care

Assume that the managers of a hospital are setting the price on a new outpatient service. Here are relevant data estimates:

Variable cost per unit- $5.00
Annual direct fixed costs- $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?
b. What per visit price must be set for the service to earn an annual profit of $100,000?

Solution Preview

a. What per visit price must be set for the service to break even?

In this case, we can use the break-even formula and treat the overhead allocation as a fixed cost.

((Price/visit - Variable costs/visit)* Number of visits) - Direct fixed ...

Solution Summary

This solution illustrates how to use breakeven analysis in a hospital and how to compute the sales needed to reach a profit target in that hospital.

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