Question

Determining charges for private pay residents. Shady Grove Nursing Home has 250 residents. The administrator is concerned about balancing the ratio of its private pay to non-private pay patients. Non-private pay sources reimburse an average of $155 per day whereas private pay residents pay on average 90 percent of full daily charges. The admin- istrator estimates that variable cost per resident per day is $80 for supplies, food, and contracted services, and annual fixed costs are $10 million.

a. What is the daily contribution margin of each non-private pay resident?

b. If 25 percent of the residents are non-private pay, what will Shady Grove charge the private pay patients to break even?

c. What if non-private pay payors cover 50 percent of the residents?

d. The owner of Shady Grove Nursing Home insists that the facility earn $1 million in annual profits. How much must the administrator raise the per day charge for the privately insured residents if 25 percent of the residents are covered by non-private pay payors?

Answer 1

Part A

daily contribution margin of each non-private pay resident =

price- variable costs = $155 – 80 = $75

Part B

At break even, profit = 0

Profit = revenue- total cost

155x-(80x+10000000)=0

X = 10000000/75 = 133333.33

Shady Grove will charge the private pay patients to break even

133333.33*75%= $100,000

Part C

At 50 %, she will charge 133333.33*50% = $66666.67

Part D

Private payers account for 75% of the annual profitsThat is, 75%*100000 = $75000

Profit= revenues – costs

75,000 = 155x – (80x+10000000)

75x = 9925000

X= 9925000/75 = 132333.33

Charge = 132333.33