Business Finance – Accounting

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Provide detailed descriptions and show all calculations used to arrive at solutions for the following questions:

1. Your firm has $45.0 million invested in accounts receivable, which is 90 days of net revenues. If this value could be reduced to 50 days, what annual increase in income would your firm realize if the increase in cash could be invested at 7.5 percent?

Use the following information to answer questions 2 and 3:
You have been asked to establish a pricing structure for radiology on a per-procedure basis. Present budgetary data is presented below:

Number of Budgeted Procedures 10,000Budgeted Cost$400,000Desired Profit$ 80,000

It is estimated that Medicare patients comprise 40 percent of total radiology volume and will pay on average $38.00 per procedure. Approximately 10 percent of the patients are cost payers. The remaining charge payers are summarized below:

PayerVolume %Discount %Blue Cross

20

4

Unity

15

10

Kaiser

10

10

Self-Pay

5

40

 

50%

 

2. If the forecasted volume increased to 12,000 procedures and budgeted costs increased to $440,000, while all other variables remained constant, what price should be established?

3. Assume that the only change in the original example data is that Blue Cross raises their discount to 20 percent. What price should be set?

 

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:

  1. Total Budgeted Revenue from Medicare: 10,000 procedures * 40% Medicare volume * $38.00/procedure (Medicare rate) = $1,520,000
  2. Total Budgeted Revenue excluding Medicare: $80,000 (Desired Profit) + $400,000 (Budgeted Cost) = $480,000
  3. 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.

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:

  1. Discounted Revenue from Blue Cross: 10,000 procedures * 20% Blue Cross volume * ($40 Budgeted Price) * (80% Blue Cross Discount) = $64,000 (discounted revenue)
  2. Full Revenue from Blue Cross: 10,000 procedures * 20% Blue Cross volume * ($40 Budgeted Price) = $80,000 (full revenue)
  3. 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.

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