Reference no: EM131966120

 

Key concept: Determining volume to achieve target profit for a taxable entity

Dr. Brandon started a for-profit immunization clinic in January 2013. The clinic was founded with the vision of providing five types of immunization injections for a low price of $10 each, with the aim of making them affordable to all.

Immunization Clinic Inc. is located in a small building rented at a cost of $1,000 per month. The clinic hired one nurse to work full-time and two college students to work 20 hours per week. A certified public accountant (CPA) also was hired at a cost of $1,000 per month to handle billings, collections, payroll, payments, financial records, monthly financial statements, and tax returns. Necessary equipment was purchased for cash. Dr. Brandon has noticed that expenses for medical supplies and advertising have varied while the remaining expenses have been relatively constant.

Between 2013 and 2015, the patient volume doubled. Profits have much more than doubled. Dr. Brandon does not understand why profits have gone up so much faster than patient volume. The CPA prepared the following forecasted income statement for 2016:

PROJECTED INCOME STATEMENT FOR YEAR END DECEMBER 31, 2016

Revenues:                                                       $480,000

Expenses:                              

Medical supplies                                      $160,000

Physician Salary                                      $60,000

Nurse salary                                           $40,000

Hourly wages                                         $20,000

Payroll taxes- Benefits                             $36,000

Rent                                                     $12,000

Professional fees                                     $12,000

Equipment depreciation                            $5,000

Utilities                                                 $6,000

Advertising                                            $20,000

Misc. Expenses                                      $15,000

Total Expenses:                                            $386,000

Income before income tax                        $94,000

Income tax expense                                $23,500

Net income                                            $70,500

Assignments and Questions

1. Determine the breakeven volume of injections for 2016 using the following formula for the contribution margin ratio approach: Breakeven revenue = Total fixed costs + [(Total variable costs / Total revenue) × Breakeven revenue].

2. Dr. Brandon would like an after-tax net income of $200,000. What volume of injections will be necessary to obtain the desired income? How many injections per day will this be, based on 250 working days per year?

3. Dr. Brandon thinks that 250 injections per day is the maximum possible with current staffing. What options might he consider to help him achieve his target after-tax income of $200,000?

4. Compute the likely 2016 operating leverage, and briefly explain to Dr. Brandon why his net income has increased at a faster rate than his revenues. (Hint: Degree of operating leverage = Total contribution margin / Profit.)

5. Briefly explain to Dr. Brandon why his cash flow for 2016 will likely exceed his net income.