Medina Hospital has variable costs of 75% of total revenues and fixed costs of $40 million per year.There are 40,000 patient-days estimated for next year.What is the average daily revenue per patient necessary to breakeven?
A)$250
B)$1,000
C)$4,000
D)$20,000

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost for next year: 
Total Cost = Fixed Cost + Variable Cost 
Variable Cost = 75% of Revenue 
We don't know the revenue yet, but we can use the fact that there will be 40,000 patient-days next year. Let's assume that the average revenue per patient-day is R. 
Total Revenue = R * 40,000 
Variable Cost = 75% * Total Revenue = 0.75 * R * 40,000 
Total Cost = Fixed Cost + Variable Cost = 40,000,000 + 0.75 * R * 40,000 
For break-even, Total Cost = Total Revenue: 
40,000,000 + 0.75 * R * 40,000 = R * 40,000 
40,000,000 = R * (40,000 - 0.75 * 40,000) 
40,000,000 = R * 10,000 
R = $4,000

Therefore, the average daily revenue per patient necessary to break-even is $4,000.

Medina Hospital Has Variable Costs of 75% of Total Revenues