Explain the difference between fixed costs, semi-fixed costs, and variable costs.
Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc. Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc. Mixed costs or semi-variable costs have properties of both fixed and variable costs due to presence of both variable and fixed components in them.
a. What is operating leverage? Operating leverage is the degree to which fixed costs exist in a company's cost structure. Generally speaking, operating leverage is fixed costs divided by total costs.
b. How is it measured? Operating Leverage is measured by comparing the change in profits to the change in sales. Higher levels of operating leverage tend to result in wider variations in profits given a change in sales.
What are the critical differences in profit analysis when conducted in a capitated environment versus a fee-for-service environment?
In fee-for-service environment, each inpatient hospital stay and each outpatient visit will generate additional revenue. The basis for payment may be charges, discounted charges, prospective payment, per diem, or some other methodology, but the key feature of fee-for-service reimbursement is that higher patient volume leads to increased revenues. Capitation is a flat periodic payment per enrollee to a healthcare provider; it is the sole reimbursement for providing services to a defined population. Capitation payments are expressed as some dollar amount per member per month, where the word "member" typically means enrollee in some managed care plan. Under fee-for-service, all volumes less than breakeven