Test A Test B Test C

Test A Test B Test C

Disposable syringe $3.00 $3.00 $3.00

Blood vial 0.50 0.50 0.50

Forms 0.15 0.15 0.15

Reagents 0.80 0.60 1.20

Sterile bandage 0.10 0.10 0.10

Breakage/losses 0.05 0.05 0.05

When the tests are combined, only one syringe, form, and sterile ban­dage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vials are required, and reagent costs will remain the same (reagents from all three tests are required).

1.As a starting point, what is the price of the combined test assuming

marginal cost pricing?

2.Assume that Allied wants a contribution margin of $10 per test.

What price must be set to achieve this goal?

3.Allied estimates that 2,000 of the combined tests will be conduct­ed during the first year. The annual allocation of direct fixed and

overhead costs total $40,000. What price must be set to cover full

costs? What price must be set to produce a profit of $20,000 on the combined test?

7.4 Assume that Valley Forge Hospital has only the following three payer groups:

Number of Average Revenue Variable Cost

Payer Admissions per Admission per Admission

PennCare 1,000 $5,000 $3,000

Medicare 4,000 4,500 4,000

Commercial 8,000 7,000 2,500

The hospital’s fixed costs are $38 million,

1.What is the hospital’s net income?

2.Assume that half of the 100.000 covered lives in the commercial payer group will be moved into a capitated plan. All utilization and cost data remain the same. What PMPM rate will the hospital have to charge to retain its Part a net income?

3.What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by10 percent?

4.Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for the capitated group were lowered to $2,200?

8.1

Consider the following 2011 data for Newark General Hospital (in millions of dollars):

Static Flexible Actual

Budget Budget Results

Revenues $4.7 $4.8 $4.5

Costs 4.1 4.1 4.2

Profits 0.6 0.7 0.3

a. Calculate and interpret the profit variance.

b. Calculate and interpret the revenue variance.

c. Calculate and interpret the cost variance.

d. Calculate and interpret the volume and price variances on the revenue side.

e. Calculate and interpret the volume and management variances on the cost side.

f. How are the variances calculated above related?

8.4 Refer to Carroll Clinic’s 2011 operating budget contained in Exhibit 8.3, Instead of the actual results reported in Exhibit 8.4, assume the results reported below:

Carroll Clinic: New 2011 Results

/. Volume:

A. FFS 34,000 visits

B. Capitated lives 30,000 members

Number of member-months 360,000

Actual utilization per

member-month 0.12

Number of visits 43,200 visits

C. Total actual visits 77,200 visits

II. Revenues:

A.FFS $28 per visit

X 34,000 actual visits $ 952,000

B. Capitated lives $ 2.75 PMPM

X 360,000 actual member-months $ 990,000

C.Total actual revenues $1,942,000

III. Costs:

A. Variable Costs:

Labor $1,242,000 (46,000 hours at $27/hour)

Supplies 126,000 (90,000 units at $1.40/unit)

Total variable costs $ 17.72 ($1,368,000 / 77,200)

B. Fixed Costs

Overhead, plant,

and equipment $525,000

C. Total actual costs $1,893,000

IV. Profit & Loss Statement:

Revenues:

FFS $952,000

Capitated $990,000

Total $1,942,000

Costs:

Variable:

FFS $602,487

Capitated 765,513

Total $1,368,000

Contribution Margin $574,000

Fixed Costs 525,000

Actual profit $49,000

1.Construct Carroll’s flexible budget for 2011.

2.What are the profit variance, revenue variance, and cost variance?

3.Consider the revenue variance. What is the component volume variance? The price variance?

4.Break down the cost variance into volume and management components.

5.Break down the management variance into labor, supplies, and fixed cost variances.

6.Interpret your results. In particular, focus on the differences between the variance analysis here and the Carroll Clinic illustration presented in the chapter.