Business Finance – Accounting

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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?

Sample Solution

 

Answers to your questions:

  1. Increased Income from Reduced Accounts Receivable

Solution:

Here’s how to calculate the annual increase in income:

  1. a) Calculate the current average collection period in days:

Current Collection Period = Accounts Receivable / Daily Revenue

Since we don’t have daily revenue information, we can’t calculate the exact number of days. However, we know the collection period is 90 days.

  1. b) Calculate the desired collection period in days:

Desired Collection Period = 50 days

  1. c) Calculate the difference in collection period:

Collection Period Reduction = Current Collection Period – Desired Collection Period

Collection Period Reduction = 90 days – 50 days = 40 days

  1. d) Calculate the annual revenue increase:

Here, we need to estimate daily revenue. Let’s assume daily revenue (DR) is constant.

Annual Revenue Increase = (Collection Period Reduction * DR) / 365 days

Note: Without daily revenue information, we can’t calculate the exact increase. However, the formula provides the framework.

  1. e) Calculate the investment income on the revenue increase:

Investment Income = Annual Revenue Increase * Interest Rate

Note: Again, due to missing daily revenue data, we can’t calculate the exact investment income. However, the formula shows the process.

  1. Pricing for Increased Volume and Cost

Solution:

  1. a) Calculate the total budgeted revenue required:

Total Budgeted Revenue = Budgeted Cost + Desired Profit

Total Budgeted Revenue = $440,000 + $80,000 = $520,000

  1. b) Calculate the revenue needed from non-Medicare patients:

Total Budgeted Revenue – Medicare Revenue

Medicare Revenue = Number of Medicare Procedures * Average Medicare Payment

Medicare Revenue = 10,000 procedures * $38/procedure = $380,000

Non-Medicare Revenue = $520,000 – $380,000 = $140,000

  1. c) Calculate the weighted average discount for non-Medicare payers:

Weighted Average Discount = (Volume1 * Discount1) + (Volume2 * Discount2) + (Volume3 * Discount3) + (Volume4 * Discount4) / Total Non-Medicare Volume

Weighted Average Discount = (20% * 20%) + (15% * 10%) + (10% * 10%) + (5% * 40%) / (20% + 15% + 10% + 5%)

Weighted Average Discount = (400 + 150 + 100 + 200) / 50 = 850 / 50 = 17%

  1. d) Apply the weighted average discount to the non-Medicare revenue to find the charge per procedure needed:

Charge per Procedure = Non-Medicare Revenue / (1 – Weighted Average Discount)

Charge per Procedure = $140,000 / (1 – 0.17) = $140,000 / 0.83 = $168.68 (rounded to two decimals)

Therefore, the price needs to be set at approximately $168.68 per procedure.

  1. Pricing with Increased Blue Cross Discount

Solution:

Follow the same steps as question 2, but adjust the weighted average discount calculation to reflect the increased Blue Cross discount (20%).

Weighted Average Discount:

Weighted Average Discount = (20% * 20%) + (15% * 10%) + (10% * 10%) + (5% * 40%) / (20% + 15% + 10% + 5%)

Weighted Average Discount = (400 + 150 + 100 + 200) / 50 = 850 / 50 = 17% (This might be surprising, but with a higher discount for a larger volume payer, the overall discount can decrease slightly)

Charge per Procedure:

Charge per Procedure = $140,000 / (1 – 0.17) = $140,000 / 0.83 = $168.68 (rounded to two decimals)

Surprisingly, the price remains the same at approximately $168.68 per procedure. This is because the increased discount for Blue Cross is offset by the larger volume of patients they represent.

 

 

 

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