Dr. Jones Is Interested In Expanding His Practice By Adding

Dr Jones Isinterested In Expanding His Practice Byaddinga Piece Of Ra

Dr. Jones is interested in expanding his practice by adding a piece of radiology equipment. The basic cost of the equipment would be $79,000 for the first year. The monthly loan cost for this equipment is $1,564.29 for five years. Additionally, Dr. Jones will have to factor in the cost to hire a radiology technician with a predicted $39,600 annual salary, including all taxes and fringe benefits. The office already has a radiology room, so there are no fixed costs associated with this purchase.

You help Dr. Jones determine that the office will perform 1,100 studies per year, with an average reimbursement of $51.63 per study. The variable cost per study is $3.24. Using the standard pro forma sheet, is this a good purchase?

Paper For Above instruction

Introduction

Expanding a medical practice through the addition of new radiology equipment requires a thorough financial analysis to determine its viability. The decision hinges on whether the expected revenues and cost savings outweigh the investment and ongoing expenses. This paper evaluates the proposed purchase using financial metrics such as contribution margin, break-even analysis, and net profitability, based on provided estimates of costs and revenues.

Financial Overview

The initial investment includes a purchase price of $79,000. The financing cost is represented by the monthly loan payment of $1,564.29 over five years, which totals to an outright financing expense of approximately $93,857.40 in principal and interest (assuming consistent payments). The ongoing operational expense comprises a radiology technician's salary of $39,600 annually, encompassing taxes and fringe benefits. Since the radiology room is already existing, fixed costs related to space are considered zero for this analysis.

The projected workload of 1,100 studies annually presents an anticipated revenue of $51.63 per study, resulting in total gross revenues of $56,793 ($51.63 x 1,100). The variable cost per study is $3.24, totaling $3,564 for the year, which is directly associated with each procedure.

Contribution Margin and Break-Even Analysis

The contribution margin per study is calculated by subtracting the variable cost from the reimbursement:

Contribution Margin per Study = $51.63 - $3.24 = $48.39.

Total contribution margin for all studies annually amounts to:

$48.39 x 1,100 = $53,229.

Deducting the annual technician’s salary:

$53,229 - $39,600 = $13,629.

Next, consider the loan payments:

- The total loan repayment over five years is approximately $93,857.40.

- The annual loan cost is hence about $18,771.48 ($93,857.40 / 5).

Subtracting the annual loan costs:

$13,629 - $18,771.48 = -$5,142.48.

This indicates that solely considering the contribution margin, technician salary, and loan payments, the operation would operate at a loss of approximately $5,142.48 annually before taxes and other potential costs.

Profitability Analysis

The negative result suggests that, under current assumptions, the practice would not recover the full cost of the equipment within one year. Even with the projection of 1,100 studies, the revenue generated does not cover the sum of the technician's salary and loan repayments.

However, it is vital to consider that this analysis does not include potential intangible benefits such as increased patient volume, improved service offerings leading to additional revenue streams, or enhanced practice reputation. Also, the analysis assumes static workload and costs, which may vary over time.

Additional Considerations and Recommendations

To make a more comprehensive decision, Dr. Jones should evaluate potential growth in the number of studies performed over the years, possible increases in reimbursement rates, or cost reductions. Negotiating better loan terms or sharing equipment costs with nearby facilities could also improve financial viability.

Furthermore, even in a short-term loss scenario, strategic benefits such as improved patient retention and attracting new patients could justify the investment. If the practice anticipates a steady increase in demand or additional revenue from the new service, the project’s financial outlook could become favorable.

Conclusion

Based on the straightforward pro forma analysis, the purchase of the radiology equipment at current estimates appears unprofitable due to high loan costs and operational expenses exceeding the contribution margin from the projected studies. Unless Dr. Jones expects significant growth or other financial benefits from this investment, the purchase may not be justified purely on financial grounds.

References

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