Provide detailed descriptions and show all calculations used to arrive at solutions for the following questions:
1. Your firm has $45.0 million invested in accounts receivable, which is 90 days of net revenues. If this value could be reduced to 50 days, what annual increase in income would your firm realize if the increase in cash could be invested at 7.5 percent?
Use the following information to answer questions 2, and 3:
You have been asked to establish a pricing structure for radiology on a per-procedure basis. Present budgetary data is presented below:
| Number of Budgeted Procedures | 10,000 |
| Budgeted Cost | $400,000 |
| Desired Profit | $ 80,000 |
It is estimated that Medicare patients comprise 40 percent of total radiology volume and will pay on average $38.00 per procedure. Approximately 10 percent of the patients are cost payers. The remaining charge payers are summarized below:
| Payer | Volume % | Discount % |
| Blue Cross | 20 | 4 |
| Unity | 15 | 10 |
| Kaiser | 10 | 10 |
| Self-Pay | 5 | 40 |
50% |
Your supervisor recommends the following method to set the rate per procedure in order to generate the required $80,000 in profit:
Weighted Discount = (0.4 × 0.04) + (0.30 × 0.10) + (0.20 × 0.10) + (0.10 × 0.40)
= 0.106
Price = ($400,000 ÷ 10,000) + [($80,000 + 4,000 ($40.00 – $38.00)) ÷ 5,000]
1 – 0.106
=($40.00 + $17.60)/.894 = $64.43
2. If the forecasted volume increased to 12,000 procedures and budgeted costs increased to $440,000, while all other variables remained constant, what price should be established?
3. Assume that the only change in the original example data is that Blue Cross raises their discount to 20 percent. What price should be set?
Expert Solution Preview
Introduction:
In this assignment, detailed solutions and calculations will be provided for the following questions:
1. If a firm reduces its accounts receivable from 90 days to 50 days, how much increase in income can be realized if the cash is invested at 7.5%?
2. What price per procedure should be established for radiology to generate $80,000 in profit, given certain budgetary data and payer volume information?
3. If Blue Cross raises their discount to 20%, what price per procedure should be set for radiology?
Answers:
1. The change in accounts receivable from 90 days to 50 days represents a reduction of 40 days. Therefore, the change in cash flow can be calculated as follows:
$45.0 million ÷ 90 days = $500,000 per day
$500,000 per day x 40 days = $20.0 million
If $20.0 million is invested at 7.5% annually, the increase in income would be:
$20.0 million x 7.5% = $1.5 million
Therefore, if the firm reduces its accounts receivable from 90 days to 50 days, it can realize an annual increase in income of $1.5 million.
2. Given the budgeted data and payer volume information, the price per procedure can be calculated as follows:
Medicare patients contribute 40% of the total volume and pay $38.00 per procedure. Therefore, Medicare revenue is:
40% x 10,000 x $38.00 = $152,000
The remaining 60% of patients are charge payers and are subject to varying discounts based on their payer volume.
Weighted discount is calculated as follows:
(0.4 x 0.04) + (0.30 x 0.10) + (0.20 x 0.10) + (0.10 x 0.40) = 0.106
Based on the desired profit of $80,000 and the budgeted cost of $400,000, the price per procedure is:
($400,000 ÷ 10,000) + [($80,000 + 4,000 ($40.00 – $38.00)) ÷ 5,000] x (1 – 0.106)
= ($40.00 + $17.60) ÷ 0.894
= $64.43
Therefore, the price per procedure that should be established to generate $80,000 in profit is $64.43.
3. If Blue Cross raises their discount to 20%, the weighted discount is recalculated as follows:
(0.4 x 0.04) + (0.30 x 0.10) + (0.20 x 0.20) + (0.10 x 0.40) = 0.118
Using the same formula as in question 2, the new price per procedure that should be set is:
($400,000 ÷ 10,000) + [($80,000 + 4,000 ($40.00 – $38.00)) ÷ 5,000] x (1 – 0.118)
= ($40.00 + $17.60) ÷ 0.882
= $64.23
Therefore, if Blue Cross raises their discount to 20%, the price per procedure that should be set is $64.23.
