Assume That A Radiologist Group Practice Has The Following C

53 Assume That A Radiologist Group Practice Has The Following Cost St

Assume that a radiologist group practice has a fixed cost of $500,000, a variable cost per procedure of $25, and charges $100 per procedure. The group expects to perform 7,500 procedures in the coming year.

Construct the group's projected profit and loss statement based on these figures. Calculate the contribution margin per procedure and determine the breakeven point. Additionally, find the required volume of procedures to achieve pretax profits of $100,000 and $200,000. Provide a CVP analysis graph depicting the base case situation. Finally, analyze how contracting with an HMO that offers a 20% discount on charges affects the profit and loss projection, contribution margin, breakeven point, and CVP graph.

Paper For Above instruction

The financial management and planning of healthcare practices, such as radiology groups, are critical for ensuring sustainability and profitability. Cost-volume-profit (CVP) analysis provides an essential framework for understanding how changes in volume, costs, and pricing influence profitability. This paper applies CVP principles to a hypothetical radiology group, exploring various scenarios including base case, discounts, and their implications.

Base Case Financial Analysis

The radiology group's fixed costs are $500,000 annually, with variable costs of $25 per procedure. The group expects to perform 7,500 procedures with a charge of $100 per procedure. The contribution margin per procedure is calculated as:

Contribution Margin = Selling Price per Procedure - Variable Cost per Procedure = $100 - $25 = $75

The total contribution margin at the expected volume is:

$75 × 7,500 = $562,500

The profit or loss is determined by subtracting fixed costs from total contribution margin:

Profit = Total Contribution Margin - Fixed Costs = $562,500 - $500,000 = $62,500

Thus, the projected profit for the year is $62,500, indicating a profitable operation under the forecasted volume.

The breakeven point occurs when total contribution margins equal fixed costs, which is calculated as:

Breakeven Volume = Fixed Costs / Contribution Margin per Procedure = $500,000 / $75 ≈ 6667 procedures

Therefore, the group must perform approximately 6,667 procedures to break even.

To achieve a targeted pretax profit of $100,000, the required procedure volume is calculated as follows:

Required Volume = (Fixed Costs + Target Profit) / Contribution Margin per Procedure = ($500,000 + $100,000) / $75 ≈ 8,000 procedures

Similarly, for a pretax profit of $200,000:

Required Volume = ($500,000 + $200,000) / $75 ≈ 9,333 procedures

These calculations suggest that increasing procedure volume directly enhances profitability and demonstrates the importance of volume expansion strategies.

CVP Graph for Base Case

The CVP graph illustrates total revenue and total costs against procedure volume. The total revenue line starts at zero and increases linearly at $100 per procedure. The total cost line includes fixed costs plus variable costs:

Total Cost = Fixed Costs + (Variable Cost per Procedure × Volume)

The intersection of revenue and cost lines marks the breakeven point at approximately 6,667 procedures. Above this point, the practice gains profit; below, it incurs loss. Visualizing this helps management understand the sensitivity of profit to volume changes.

Impact of Contracting with HMO at 20% Discount

Assuming the HMO negotiates a 20% discount, the new charge per procedure becomes:

$100 × 80% = $80

The contribution margin per procedure under this discount is:

$80 - $25 = $55

The new breakeven volume is:

$500,000 / $55 ≈ 9091 procedures

To attain a $100,000 profit target:

($500,000 + $100,000) / $55 ≈ 10,909 procedures

Similarly, for a $200,000 profit:

($500,000 + $200,000) / $55 ≈ 11,818 procedures

The discount reduces the contribution margin, thus increasing the required volume for breakeven and profitability, highlighting the impact of payor contracts on financial viability.

The CVP graph under this scenario shifts upward, reflecting higher volume needs for breakeven and profits, emphasizing the importance of pricing negotiations and volume strategies in managed care environments.

Conclusion

CVP analysis provides invaluable insights into the financial dynamics of healthcare practices. Understanding the relationships among volume, costs, pricing, and profits enables management to make informed decisions, especially when adjusting for contractual discounts with payors like HMOs. Strategic planning should include scenario analyses such as these to ensure sustainability and growth.

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