Posted: April 17th, 2016

What is the group’s contribution margin? What is its breakeven point?

5.1
Consider the CVP graphs below for two providers operating in a fee-for-service environment: see attached file
a. Assuming the graphs are drawn to the same scale, which provider has the greater
fixed costs? The greater variable cost rate? The greater per unit revenue?
b.Which provider has the greater contribution margin?
c.Which provider needs the higher volume to break even?
d. How would the graphs change if the providers were operating in a discounted fee-for-
service environment? In a capitalized environment?

A. The provider to the right has higher fixed costs (the flat line)
B. The variable cost per unit (the sloping line that starts at the flat line level) is about the same for both but the revenue line (the one that starts at the 0 level) is steeper for the one on the right. So, the contribution margin is greater for the one on the right.
C. The one on the left likely needs higher volume to breakeven since the contribution margin is low and so even though fixed costs are lower, each unit doesn’t throw off very much. You can see where the revenue line crosses the total cost line is farther to the right (more units) for the one on the right.
D. In a discounted-for-fee, the revenue line would be lower. In a capitalized environment, the fixed costs line would be higher.

5.3
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

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

a. Construct the group’s base case projected P&L statement.
b. What is the group’s contribution margin? What is its breakeven 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. Now assume that the practice contracts with one HMO, and the plan proposes a 20 percent discount from charges. Redo questions a, b, c, and d under these conditions.

5.4