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CVP Analysis

Assume that a radiologist group practice has the following cost structure:
Fixed costs $500,000
Variable cost per procedure $25
Charge (revenue) per procedure $100

Assume that the group expects to perform 7,500 procedures in the coming year.

a. Construct the group's base case projected profit and loss statement.
b. What is the group's contribution margin? What is the break-even point?
c. What volume is required to provide a pretax profit of $100,000? A pretax profit of $200,000?
d. Sketch out a CVP analysis graph depicting the base case situation.
e. Assume the practice contracts with one HMO and the plan propose 20% discount from charges. Redo questions a, b, c, and d under these conditions.

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Solution Preview

Please refer attached file for graphs.

a. Construct the group's base case projected profit and loss statement.

P/L Statement
Total Revenues : 7500@$100 $750,000.00
Less
Variable Costs: 7500@ $25 $187,500.00
Fixed Costs $500,000.00
Total Costs $687,500.00
Operating profits $62,500.00

b. What is the group's contribution margin? What is the break even point?

Fixed Cost=F=$500,000
Revenue per procedure=P=$100
Variable Cost per procedure=V= $25
Contribution margin per procedure=CM=P-V=$75

Base Case Volume=Q=7500
Total Contribution Margin=Q*CM=$562,500

BEP (in units)=F/CM=6666.67 procedures
BEP ($)=BEP in units*P=$666,666.67

c. What volume is required to provide a pretax profit of $100,000? A pretax profit of $200,000?

Fixed Cost=F=$500,000
Revenue per procedure=P=$100
Variable Cost ...

Solution Summary

Solution describes the steps to find out break even point in the given cases. It also provides CVP analysis with the help of suitable graphs.

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