Question

The variable costs of Amina hospital represent 70% of total revenue and fixed costs of AED 15,000,000 for the year 2019.

Required:

1. Compute the BEP expressed in total revenue.

2. If total revenue in 2019 was AED 70,000,000 from 60,000 patients, find out the BEP (Q).

3.If the average patient cant afford to pay more than $866, what the professional advice that would give to the owners of Amina Hospital. The answer should be supported by computation.

Answer 1

1. BEP = Fixed Costs / Contribution Margin Ratio

Fixed Costs = 15,000,000

Contribution Margin Ratio = 100% - 70%

= 30%

Hence,

BEP in Revenue = 15,000,000 / 30%

= AED 50,000,000

2. BEP (Q) = Fixed Costs / Contribution Margin

Fixed Costs = 15,000,000

Contribution Margin = (Revenue - Variable Costs) / Number of Patients

= [70,000,000 - (70,000,000*70%)] / 60,000

= (70,000,000 - 49,000,000) / 60,000

= 21,000,000 / 60,000

= 350

Hence,

BEP (Q) = 15,000,000 / 350

= 42,858 (rounded off)

3. Break Even Revenue = 50,000,000

Average Price per patient = $866
Number of Patients to reach break even = 50,000,000 / 866

= 57,737 (rounded off)

Hence, even if the average price per patient is $866, the hospital can reach Breakeven if 57,737 patients are attended to.