Question

Assume that a radiology group practice has the following cost structure: Fixed costs = $500,000 Variable cost per procedure = $25 Furthermore, assume that the group expects to perform 7,500 procedures in the coming year. a. What is the group’s underlying cost structure?b. What are the group’s expected total costs?c. What are the group’s estimated total costs at 5,000 procedures? At 10,000 procedures?d. What is the average cost per procedure at 5,000, 7,500, and 10,000 procedures

Answer 1

Answer:

(a) $91.67

(b) $687,500

(c) $625,000; $750,000

(d) $125; $91.67; $75

Explanation:

(a) Underlying cost structure:

= [($25 × 7,500) + $500,000] ÷ 7,500

= $91.67

(b) Expected total cost:

= $500,000 + ($25 × 7,500)

= $687,500

(c) Estimated total cost at 5,000:

= $500,000 + ($25 × 5,000)

= $625,000

Estimated total cost at 10,000:

= $500,000 + ($25 × 10,000)  

= $750,000

(d) Average cost per procedure at 5,000:

= [($25 × 5,000) + $500,000] ÷ 5,000

= $125

Average cost per procedure at 7,500:

= [($25 × 7,500) + $500,000] ÷ 7,500

= $91.67

Average cost per procedure at 10,000:

[($25 × 10,000) + $500,000] ÷ 10,000

= $75