Business Finance - Accounting
Steps:
- Calculate Revenue Needed per Non-Medicare Procedure: ($1,040,000 Shortfall) / (10,000 procedures * 60% Non-Medicare volume) = $17.33 per procedure (additional revenue needed)
- Increase Budgeted Price per Procedure: Existing budgeted cost per procedure + Additional revenue needed = Target price
- Existing Cost per Procedure: $400,000 (Budgeted Cost) / 10,000 procedures = $40 per procedure
Solution: Target Price = $40/procedure + $17.33/procedure = $57.33 per procedure (approx.)
Therefore, with a forecasted volume increase to 12,000 procedures, the price per procedure should be set at approximately $57.33 to cover costs and achieve the desired profit.
3. Price per Procedure with Increased Blue Cross Discount:
Calculations:
- Discounted Revenue from Blue Cross: 10,000 procedures * 20% Blue Cross volume * ($40 Budgeted Price) * (80% Blue Cross Discount) = $64,000 (discounted revenue)
- Full Revenue from Blue Cross: 10,000 procedures * 20% Blue Cross volume * ($40 Budgeted Price) = $80,000 (full revenue)
- Loss in Revenue from Blue Cross Discount: $80,000 (Full Revenue) - $64,000 (Discounted Revenue) = $16,000
Similar to question 2, we need to adjust the price to cover the loss in revenue from the increased discount.
Steps:
- Loss in Revenue per Blue Cross Procedure: $16,000 (Loss in Revenue) / (10,000 procedures * 20% Blue Cross volume) = $0.80 per procedure (loss per procedure)
- Increase Budgeted Price per Procedure: Existing budgeted cost per procedure + Loss per procedure = Target price
Solution: Target Price = $40/procedure + $0.80/procedure = $40.80 per procedure (approx.)
Therefore, considering the increased Blue Cross discount, the price per procedure should be set at approximately $40.80 to cover the additional cost.
Smaple Solution
Solutions:
1. Increase in Income due to Reduced Accounts Receivable:
Calculations:
- Reduction in Accounts Receivable: $45 million (Initial A/R) * (90 days - 50 days) / 90 days = $15 million
- Investment Opportunity: $15 million (Reduced A/R)
- Annual Interest Rate: 7.5%
Formula: Annual Increase in Income = Investment Opportunity * Annual Interest Rate
Solution: Annual Increase in Income = $15 million * 7.5% = $1.125 million
Therefore, by reducing accounts receivable and investing the freed-up cash at 7.5% annually, the firm could see an annual increase in income of $1.125 million.
2. Price per Procedure with Increased Volume:
Calculations:
- Total Budgeted Revenue from Medicare: 10,000 procedures * 40% Medicare volume * $38.00/procedure (Medicare rate) = $1,520,000
- Total Budgeted Revenue excluding Medicare: $80,000 (Desired Profit) + $400,000 (Budgeted Cost) = $480,000
- Target Revenue from Non-Medicare Patients: $480,000 - $1,520,000 (Medicare Revenue) = -$1,040,000 (Negative value indicates a shortfall)
Since the target revenue is negative, we need to increase the price per procedure to cover the shortfall.