Week 4 Homework
Chapter 7: 7-1, 7-2, 7-3, & 7-4
Chapter 8: 8-1, 8-2, 8-3, & 8-4
Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are relevant data estimates:
Variable cost per visit $ 5.00
Annual direct fixed costs $500,000
Annual overhead allocation $ 50,000
Expected annual utilization 10,000
The audiology department at Randall Clinic offers many services to the clinic’s patients. The three most common, along with cost and utilization data, are as follows:
Service Variable Cost Annual Direct Annual # Visits
per Service Fixed Costs
Basic exam $5 $50,000 3,000
Advanced examination $7 $30,000 1,500
Therapy session $10 $40,000 500
Allied Laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs:
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).
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,
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?
Here are the 2011 revenues for the Wendover Group Practice Association for four different budgets (in thousands of dollars):
Static Enrollment/Utilization) (Enrollment) Actual
Budget Budget Budget Results
$425 $200 $180 $300
a. What does the budget data tell you about the nature of Wendover’s patients: Are they capitated or fee-for-service? (Hint: See the note to
b. Calculate and interpret the following variances:
• Revenue variance
• Volume variance
• Price variance
• Enrollment variance
8.3 Here are the budgets of Brandon Surgery Center for the most recent historical quarter (in thousands of dollars):
Static Flexible Actual
Number of surgeries 1,200 1,300 1,300
Patient revenue $2,400 $2,600 $2,535
Salary expense 1,200 1,300 1,365
Non-salary expense 600 650 585
Profit $600 $650 $585
The center assumes that all revenues and costs are variable and hence tied directly to patient volume.
a. Explain how each amount in the flexible budget was calculated. (Hint
Examine the static budget to determine the relationship of each bud
get line to volume.)
b. Determine the variances for each line of the profit and loss statement,
both in dollar terms and in percentage terms. (Hint: Each line has a total variance, a volume variance, and a price variance [for revenues
and management variance [for expenses].)
c. What do the Part b results tell Brandon’s managers about the surgery center’s operations for the quarter?
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
A. FFS 34,000 visits
B. Capitated lives 30,000 members
Number of member-months 360,000
Actual utilization per
Number of visits 43,200 visits
C. Total actual visits 77,200 visits
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
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
and equipment $525,000
C. Total actual costs $1,893,000
IV. Profit & Loss Statement:
Contribution Margin $574,000
Fixed Costs 525,000
Actual profit $49,000
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