Unit 7 Managerial Accounting

Decent Essays
Providers A and B are experiencing an accounting breakeven point at the same level of revenue and cost (revenue equal accounting cost) but different volumes.
Despite having higher fixed costs, the provider B requires less number of visits to reach the breakeven volume, and start making profits.
The variable cost rate (per unit) remains constant, however the total variable costs increase or decrease as the volume changes (within a relevant range).
The contribution margin is the difference between per unit revenue and per unit variable cost (the variable cost rate). It is the dollar amount per visit available to cover fixed costs. If the fixed costs are high (provider B), then the impact of the contribution margin on the profit is low.

A) Under
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Provider B has more room for the discount, than provider A, since the profit area is wider than provider A. At the same volume provider B could still make profit even after discount. Where provider A has only a small window, and even small discount would place the provider to the left of breakeven point. After the discount, Provider A would operate under higher financial pressure. The provider would have to undertake some cost control actions, either lower the variable costs or fixed costs to push the breakeven point to the left. “To increase profit, more services must be provided or costs must be cut” ().
B) “A key feature of capitation is the reversal of the profit and loss portions of the graph” (). The capitated environment (using the number of visits as the volume measure), the projected revenues stay the same, the projected total revenue line is horizontal and does not depend on the number of visits. However, the costs still depended on the number of visits. Under the capitation, the providers must assume the utilization risk. In capitation system, each additional visit increases costs without producing more revenue. Under the capitation, the provider A is in a better position to grow business because he can increase the utilization without sacrificing the profit, where the provider B has a little room for increased
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