Good day, This is a Finance class for Health Services Administration major. Please view the attached assignment before you accept my proposal. I need someone who will no take shortcut but give me q

Notes - Chapter 7

Cost Behavior and Break Even Analysis

Identification of the difference between fixed, variable and semi variable costs. Knowing the difference between fixed and variable costs will allow the manager to compute contribution margins and break-even points.

Fixed costs are costs that do not vary in total when activity levels or volume of operations change. A classic example is in a nursing home that has rent expense which does not change from month to month regardless of how many residents are in the facility. Rent expense is the fixed cost while the number of residents is the activity or volume.

Variable costs vary in direct proportion to changes in activity level of operations. An example of a variable cost is food expense. The amount and cost of food would vary depending on the number of residents in the home at any particular point in time.

Semi variable costs vary when activity levels of operations change, but not in direct proportion. An example is referred to as a step pattern. For example, the number of LPN’s will vary based on the number of residents in a particular unit. For example, an additional LPN may be required for an increase in occupancy for 10 residents. Every additional 10 residents added to occupancy would require another LPN.

Another view of fixed costs is a fixed cost per resident. In our first fixed cost example, if rent expense is $3,000 for the month and there are 75 residents in the nursing home, then the cost per resident is $40 per month (3000/75). However, if the number of residents increases to 100, then the cost per resident is $ 30 (3000/100). Conversely, if the number of residents decreases, the cost per resident will go down.

Variable costs can be viewed two ways as well. As with fixed costs, there can be a variable cost per resident. If the variable cost of food for 75 residents is $7,500, then the variable cost per resident is $100 per resident. If there are 100 residents, variable cost would increase to $10,000 (an additional $100 per resident x 25 or $2,500).

Contribution Margin, Cost-Volume Profit and Profit-Volume Ratios

The manager must be able to understand the relationship of cost, volume and profit. This should be understood in order to understand and control the operations.

Contribution Margin

The CM represents variable costs deducted from net revenues. The example shows how CM contributes to fixed costs and profits.

Revenue $500,000 100%

Less: Variable Costs (350,000) 70%

Contribution Margin $150,000 30%

Less: Fixed Costs (120,000)

Operating Income $30,000

Cost-Volume Profit Ratio or Breakeven

The break-even point is where the contribution margin equals fixed costs. When operations exceed this break-even point, an excess of revenues over expenses is realized. But if operations does not reach the break-even point, there will be an excess of expenses over revenue.

The manager must recognize there are two ways of expressing the break-even point: either by an amount per unit or as a percentage of net revenues. If the contribution margin is expressed as a percentage of net revenues, it is often called the profit-volume (PV) ratio.

Profit-Volume (PV) Ratio

The second method of expressing the break-even point is a percentage of net revenues and that if the contribution margin is expressed as a percentage of net revenues, it is called the profit-volume (PV) ratio.

Revenue Per Visit $100 100%

Less: variable cost per visit (70) 70%

Contribution Margin per visit $ 30 30%

Fixed Costs per period $120,000

$30 contribution margin per visit divided by $100 price per visit = 30% PV Ratio