April 28, 2011
Break-even analysis helps to plan and control business by showing break-even point, net profit and net loss areas. As it is mentioned in the graph below, on the break-even point cost is equal to revenue which means there is neither loss nor profit at the intersection of sales line and cost line (Frongello).
As two graphs are provided in the question; the horizontal line shows the fixed cost where the two semi-vertical (upright) lines show variable cost and sales, respectively. Provider B has greater fixed cost than provider A because B’s fixed cost line is higher than A’s; therefore, provider B has greater fixed costs than provider A. Variable cost is determined by the gap between fixed cost line and total cost point. Provider A’s distance between its total cost and fixed cost line is greater than Provider B. Hence, Provider A has higher variable cost than B.
Provider B has greater per unit revenue than provider A because sales line has higher slope for B so it has more sales amount. b)
Fixed Costs / Unit Contribution Margin = Breakeven Point in Units
Hence, Provider B has higher contribution margin which equals to fixed costs divided by breakeven point in units. So for provider B, fixed cost is higher than A; and also breakeven point has less units than A. Consequently, Provider B has greater contribution margin. c)
Break-even point determines the situation in which company makes neither loss nor profit. Therefore, company must cover its fixed costs. So graphs show that provider B has higher fixed cost line which means it has higher cost so provider B is going to need higher volume to break even. d)
Graphs were going to be different, if providers were operating in a discounted fee-for-service environment because discounted environment would make revenue line more horizontally inclined than it was in the current graph. The reason for more horizontally line is discounted value’s selling price would be less which means also less revenue. Under Capitated environment, both providers would have same revenue lines because capitated means constant amount of revenue.
Profit= Total Revenue- Total Cost
Total Cost=Fixed cost- (Variable cost x Unit)
|Revenues |Total Variable |Fixed Costs |Total Costs |Profit | | |Costs | | | | |a. 2000 |1400 |600 |2000 |0 | |b. 4000 |1000 |600 |1600 |2400 | |c. 4000 |3000 |600 |3600 |400 |
Fixed cost= total cost- total variable cost=2000-1400=600 Profit= revenue-total costs=2000-2000=0
Revenue=total cost + profit= 1600+2400 = 4000
Fixed cost= total costs- total variable cost= 1600-1000=600 c)
Total costs= revenue-profit= 4000-400= 3600
Total variable costs- total costs-fixed cost=3600-600=3000
P&L, the Profit and Loss Statement, which is also called as Income Statement, plays an important role to show for cash flow, profit, loss, and etc. Calculations:
Total revenue= 7,500*100=$750,000
Contribution margin= 750,000 – 187,500 =$562, 500
Net income = 562,500- 500,000= $62,500
|The Profit and Loss Statement | |Procedures |7500 | |Price per procedure |$100 | | | | |Total revenue |$750,000 | |Variable costs...
References: Frongello, L. (n.d.). Break-Even Analysis. Retrieved April 2012, from Bizbound Business Resource Center: http://www.bizbound.com/breakeven.htm
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