Before the end of the Week, begin commenting on at least two of your classmates’ responses.
Review the CVP-graph PDF (i attached) for more information on CVP graphs and how to read them. Assuming the graphs are drawn to the same scale, consider the break-even charts—cost-volume-profit (CVP) graphs—below for two competing providers operating in a fee-for-service environment. On the basis of your understanding of variable cost rate, per-unit revenue, contribution margin, fixed costs, and the CVP graphs above, answer the following questions:
- Explain how the CVP graphs would change if the providers were operating in a discounted fee-for-service environment.
- Explain how the CVP graphs would change in a capitated environment. Evaluate which provider is in the best position to grow its business.
- Provide reasons for and evidence in support of your responses.
As in all assignments, cite your sources in your work and provide references for the citations in APA format.
Your initial posting should be addressed at 300-500 words
CVP-graph
© 2016 South University
(VP-graph
Now that we've explored cost behavior and taken a look at breakeven analysis, profit analysis and the
contribution format income statement, let's spend a few minutes looking at this in a graphical
presentation. What I've done here is I've created two firms; firm X and firm Y and these firms have
different cost structures.
So notice that firm X has a $40 sales price per unit, $25 variable cost per unit and that leaves it with a
$15 contribution margin per unit, taking a look at firm Y we have that same sales price of $40,
however we only have a $10 variable cost per unit which leaves us with a contribution margin of $30.
Also notice that firm X has fixed cost of $18,000 while firm Y has fixed cost of 30,000. Now what we are
seeing here is a tradeoff and this is usually a tradeoff between labor and automation, IE machinery. So
just looking at these numbers we can probably say that firm Y is more automated than firm X. They
have higher fixed cost from that machinery and they've reduced their variable cost per unit by
eliminating some of their direct labor. Firm X however has lower fixed costs but higher variable cost
per unit, so they probably have a higher amount of direct labor cost built into their cost structure.
Let's take a look at the graph, this top line I've labeled total revenue and the way I calculated that was I
had a range of Oto 2000 unit sold and I simply did some multiplications, so 2000 times my 40 dollar
unit cost gave me this point at 80,000. So the coordinates are 2000, 80000 on this top coordinate and
then off course if we sell zero units we would have zero revenues, so that describes the total revenue
line.
area of loss.
Now let's explore this beyond the breakeven point of a 1000 units. If I sell a 1000 in one units, I am
going to have profit of $30. So for every unit that I sell above the breakeven point I get $30 of
additional profit. On the flip side if I fall below the breakeven point, if I sell 999 units I have a net
operating loss of $30 and every unit I fall short of the breakeven point I incur an additional $30 of
operating loss.
Let's compare the area of profit and the area of loss for Firm Y with Firm X and we see a much
narrower triangle here. And that's because we have a smaller contribution margin per unit. So at the
breakeven point at 1200 units for Firm X, if I sell 1200 and one units, I will have net operating income
of $15. And for every unit that I sell above that 1200 unit breakeven point I am going to add an
additional $15 of operating income. So I leverage my operating income at a much lesser rate over here
in this area of profit then I did over here. But this is a double edged sword.
This line is horizontal line is my total fixed cost line and we see that comes right in 18000 for Firm X. The middle line is my total cost line. Now that includes fixed and variable cost and look where it starts out, it starts out at 18000 that's my fixed portion and then it continues up at a slope and that slope is $25 per unit. That's my variable portion. Now where these lines intersect is the breakeven point and I've calculated the breakeven point up here just to exemplify this and if you look at this and follow it down it winds up at the 1200 unit level on the x-axis. Let's take a look at Firm Y, I calculated the lines the same way and look where the total revenue and total cost line meet that's the breakeven point that makes sense doesn't it? If total revenues are equal to total costs and your net operating income is going to be zero. So I've got a 1000 unit breakeven point there it is, right there on the x-axis and Page we 2 of 3 can also see my breakeven point in dollars of 40000 points up ovFinancial er here on Management the of y-axis, Healthcare right at Organizations40000.
©2016 South University
* SCTheAccountant. (2013). CVP-graph [Video]. Available from https://www.youtube.com/watch?v=7T7EH3t8SJU
Let's take a look at these triangles that will be described by the total revenue and the total cost line.
We have got a triangle above the breakeven point and we call this triangle the area of profit. Below the
breakeven point the triangle described by the total revenue and the total cost line is called the
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Rose Cates
CVP graphs
Explain how the CVP graphs would change if the providers were operating in a discounted fee-for-service environment.
Offering service at a fee means the fee will likely differ based on the amount of service offered. The variable and fixed expenses incurred remain the same, with similarly reduced prices for each unit. In that environment, the contribution margin is likely to drop (Limendo. 2019). For instance, if a company offers a sales price of $15 for every unit and the sales price is $30, giving the customers a discount of $5 will result in a sales price of $25 for every unit sold. But the variable expenses are expected to remain around $15. With the sum of $15 and $25 reduced by 50%, it will reduce $10. Such changes are easily noticeable. The change observed in both graphs will be the same since the sales revenue will shift to the left. The other lines will remain in the same position. This would mean that giving a discount will not have an effect on the costs and affects the contribution margin. A company might try to sell more units to recover from the lost income lost in the discount offered (Kaczorowska et al., 2019). This will cause the revenue line to shift to the left.
Explain how the CVP graphs would change in a capitated environment. Evaluate which provider is in the best position to grow its business.
In a capitated environment, the changes happening to the CVP graph are that only two lines would appear. This is because the government has covered the overhead costs for professionals within a capitated environment such as doctors and teachers. Therefore, they only remain with fixed expenses. Therefore, only the income and total and fixed expense lines will appear. Based on the data shown in the graphs, farm Y seems to be in a better position to expand. Y seems to have a positive contribution margin based on the rise in production resources compared to Farm X (Mzyece et al., 2023). Y also seems to have much larger fixed expenses. The data shows that Y is capable of maintaining low variable costs since there are fewer expenses incurred in purchasing direct labor.
References
Kaczorowska, A., Słoniec, J. & Motyka, S. (2019). Portfolio approach to project management in creation of the organization’s value. MATEC Web of Conferences.DO10.1051/matecconf/201925206011. https://www.researchgate.net/publication/330363292_Portfolio_approach_to_project_management_in_creation_of_the_organization%27s_value
Limendo. (2019). Customer Portfolio Profitability. https://limendo.com/en/portfolio/customer-portfolio-profitability-2/
Mzyece A, Amanor-Boadu V. & Ng'ombe J. N. (2023). An enterprise structure approach improves index-based crop portfolio decision-making. Front. Environ. Econ. 2:1074865. doi: 10.3389/frevc.2023.1074865. https://www.frontiersin.org/articles/10.3389/frevc.2023.1074865/full
,
Rose Cates
CVP graphs
Explain how the CVP graphs would change if the providers were operating in a discounted fee-for-service environment.
Offering service at a fee means the fee will likely differ based on the amount of service offered. The variable and fixed expenses incurred remain the same, with similarly reduced prices for each unit. In that environment, the contribution margin is likely to drop (Limendo. 2019). For instance, if a company offers a sales price of $15 for every unit and the sales price is $30, giving the customers a discount of $5 will result in a sales price of $25 for every unit sold. But the variable expenses are expected to remain around $15. With the sum of $15 and $25 reduced by 50%, it will reduce $10. Such changes are easily noticeable. The change observed in both graphs will be the same since the sales revenue will shift to the left. The other lines will remain in the same position. This would mean that giving a discount will not have an effect on the costs and affects the contribution margin. A company might try to sell more units to recover from the lost income lost in the discount offered (Kaczorowska et al., 2019). This will cause the revenue line to shift to the left.
Explain how the CVP graphs would change in a capitated environment. Evaluate which provider is in the best position to grow its business.
In a capitated environment, the changes happening to the CVP graph are that only two lines would appear. This is because the government has covered the overhead costs for professionals within a capitated environment such as doctors and teachers. Therefore, they only remain with fixed expenses. Therefore, only the income and total and fixed expense lines will appear. Based on the data shown in the graphs, farm Y seems to be in a better position to expand. Y seems to have a positive contribution margin based on the rise in production resources compared to Farm X (Mzyece et al., 2023). Y also seems to have much larger fixed expenses. The data shows that Y is capable of maintaining low variable costs since there are fewer expenses incurred in purchasing direct labor.
References
Kaczorowska, A., Słoniec, J. & Motyka, S. (2019). Portfolio approach to project management in creation of the organization’s value. MATEC Web of Conferences.DO10.1051/matecconf/201925206011. https://www.researchgate.net/publication/330363292_Portfolio_approach_to_project_management_in_creation_of_the_organization%27s_value
Limendo. (2019). Customer Portfolio Profitability. https://limendo.com/en/portfolio/customer-portfolio-profitability-2/
Mzyece A, Amanor-Boadu V. & Ng'ombe J. N. (2023). An enterprise structure approach improves index-based crop portfolio decision-making. Front. Environ. Econ. 2:1074865. doi: 10.3389/frevc.2023.1074865. https://www.frontiersin.org/articles/10.3389/frevc.2023.1074865/full
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Week 3 Lecture 1.html
Cost Allocation
An HCO, such as a hospital, has many departments that provide services to patients, such as surgery or emergency care. It also has departments that do not provide services to patients but are nevertheless necessary for providing services, for example, sterilization of instruments for surgery. The surgical department cannot operate without oxygen, sterile instruments, supplies of pharmaceuticals, and a host of other real and intangible services. Among intangibles is a billing department to collect payment for the surgeries. Cost allocation is a process like budgeting, in which the cost of the centers that do not produce revenue are allocated to the departments that use their services. For example, the surgical department may be a heavy user of the services provided by the surgical instrument sterilization department but not the nursing units. It would not be fair for both these departments to pay an equal share of the cost of sterilization of surgical instruments. The cost allocation exercise decides what proportion of the total budget of the surgical instrument sterilization department should be applied to the surgery department and what proportions to other departments that are revenue centers. These costs are indirect, but they go into providing the service offered by the surgery department. This is true of all of the services that enable services that create revenue. The cost allocation process can cause friction within the organization as the revenue earning departments do not want the cost burdens that lower their departmental performance, especially when they feel the cost shares are unfair. As a leader, you must understand the concept of cost allocation and the internal friction it can bring about so that you can deal with these issues in, what TV channels like to call, fair and balanced ways.
In this lecture we looked setting prices and introduce planning a budget. The assignments are critical to cementing your understanding of these processes and concepts. Spend the time you need to get comfortable with them.
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Week 3 Lecture 2.html
Pricing and Service Decisions
Pricing and service decisions are related but separate. Service decisions involve reviewing the community's needs and the supply of some of these needs by other organizations to determine what and how much services are needed. For example, if another organization is providing orthopedics but not urology, you probably need to provide urology and not focus on orthopedics. If another organization is a level III tier center and is nearby, it probably does not make sense for you to be a level I trauma center. You will likely not see much business, but a trauma center requires doctors on staff for all major traumas at all times, which is very expensive. Service decisions are among the first decisions you should make and involve taking a holistic view of the community and deciding which services you should offer. Pricing decisions involve a look at the indirect costs discussed earlier, such as charity care and bad debt, and the contracted prices for the services. Medicare; Medicaid; private payers; third-party payers, such as Blue Cross/Blue Shield; and self-payers are different types of payers and make up a payer mix. A spreadsheet or a computer model can be used to analyze the prices and the services to be provided to each of these types of payers and to estimate the revenue. The hospital or another service provider cannot adjust the prices paid by the government under Medicare and Medicaid, but it can negotiate prices with all other payers.
Besides the social cost, understand that this type of behavior on the part of HCOs is what causes the government to step in and regulate prices. It is wiser for you as a leader to understand that cost-shifting may work for now but might also cause catastrophe for your organization later.
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Week 3 Lecture 3.html
Strategic Planning
Strategic planning is the basis of all of the organization's future endeavors. Strategic planning is founded on the organization's mission, vision, and values but does not provide managers with the details needed for everyday operations. By managing the budget day by day, the operational details are uncovered. What is obtained from the strategic plan is a vision of the organization over a period of five years or so. This timeline is necessary because many of the capital projects that an organization takes on, such as construction of new buildings, takes place over a period of several years. An Operational Budget will forecast in a detailed method a review of all potential or estimated income which the organization can identify. Traditionally this projection or forecasting of organizational revenue is defined in a relative period of time—for most organizations this time frame is a year—however, it may be a calendar year or the organization’s own year (a fiscal year) defined by its budget protocol and may well be, as an example, June of 2014 to May 2015. The Operational Budget is representative of the entire entity and as such must rely upon the creation of sub-budgets first which are usually departmental in nature. These sub-budgets serve to drive the completed organization’s Operational Budget and as such must be detailed and accurate. One critical element to always remember here is that for all organizations the Operational Budget is short term in nature (1 year) and therefore, as outlined in the GAAP will not generally include Capital Outlay as CO is Long-Term Cost.
In this unit, we looked at different types of accounting methods and methodologies. We talked about gross and net profit, examined revenue from direct and indirect costs, and discussed the social implications of certain types of revenue and expense issues.
Inherent in these discussions were marketing decisions such as the types of services to offer, comparisons with other HCOs, the services needed by a community, and projections for the future on the basis of the expected growth of the community. Please review the following for more information before doing the assignments.