Expense Forecasting

Expense Forecasting

Name Assignment
Expense Forecasting
Based on the information provided, prepare an expense forecast for 20X1 using the template below:
Spending during January- June 20X1 (6 months)
·      Fixed expense items: $210,000
·      Variable expense items: $1,200,000
·      One time expense: $50,000 of fixed expense money was spent on preparing for a Joint Commission survey
Procedures preformed during January- June 20X1 (6 months)
·      Your department has performed 20,000 procedures during the first six months
On November 1,20X1, two new procedure technicians will begin work. The salary and fringe benefit costs for each is: $96,000 yearly
Description Fixed Variable TOTAL
Year to Date Expense
Add back “One Time” credits
Deduct “one Time” expenses
Adjusted total for year to date expense
Divide by months (fixed) 6
Multiple by months (fixed) 12
Divide by volume 20,000
Multiply by volume 40,000
Annualized Amounts
Add back “One Time” expenses
Deduct “One Time” credits
Expense two new technicians
Expense Forecast as of 12/31/X1
Annualization for Fixed: (Adjusted Total for Year to Date Expense/6) * 12 =Total Annualized Amounts
Annualization for Variable (Adjusted Total for Year to Date Expense/ 20,000) * 40,000 =Total Annualized Amounts

Marginal Profit and Loss

Marginal Profit and Loss Statement Scenario
You are examining a proposal for a new business opportunity – a new procedure for which demand is expected to be 1,400 units the first year, growing by 600 units each year thereafter. The price charged per procedure is $1,000. The collection rate is anticipated to be 80%. Each procedure consumes $300 of supplies. Salary cost is estimated to cost $540,000 each year, fringe benefits are 25% of salaries, rent for the facility is $55,000/yr and operating cost are $120,000/yr.
Year One Year Two Year Three Year Four Year Five
Marginal Revenue
Units of Volume
Price Procedure
Collection Rate
Marginal Net Revenue
Marginal Costs
Variable Costs
Units of Volume
Variable Cost Supplies per Unit/procedure
Marginal Variable Cost
Fixed Costs
Salary Costs
Fringe Benefits
Operating Cost
Marginal Fixed Costs
Total Marginal Costs
Annual Marginal Profit
Cumulative Profit Margin
Question: Below is a marginal P&L for this business opportunity. Based on that analysis, should this opportunity be pursued. Explain your decision.

Breakeven Analysis

Break-Even Analysis Scenario
You can charge $1,075 for a new service. Demand is anticipated to be 8,000 units a year. Your business is able to handle up to 16,500 units annually, so capacity should not be a problem. The average collection rate is 80%. The new service has annual fixed costs of $4,700,000. Variable cost per unit of service is $420.
Price to be Charged
Collection Rate
Average Collection per Service
Variable cost per unit of service
Fixed Operating Costs
Break-Even Point =
Fixed Cost/(Net Revenue per Unit-Variable Cost per Unit)
Question: Use break-even analysis to determine if this new service is financially viable. If the business is not financially viable, what steps could you take to make a case to proceed with implementation? Explain your decision.

Benefit Cost Ratio

Benefit/Cost Ratio Analysis Scenario
You are considering the acquisition of a new piece of equipment with a useful life of five years. This new technology will make your clinical operation more efficient and allow for a reduction of 10 FTEs. The equipment purchase price is $4,500,000 plus 10% installation fee. The purchase price includes service for the first year, an item that has an annual cost of $10,000. There is a potential for additional volume of 150,000 units in the first year, growing by 30,000 each year thereafter. The price charged per unit is $15.00 with a 50% collection rate. The staff being eliminated are paid $12.50 per hour. The fringe benefits rate is 20%. The hurdle rate is 7.5%.
Question: After reviewing Dr. Ward’s Video and the calculations below, please answer the following questions: 1. What is meant by benefit/cost ratio, average payback period and ROI and why are the all important to understand when purchasing new equipment? Based on this information, would you pursue this opportunity? Explain your decision in 250-500 words in the text box below.
Investment Present Value
Present Value Factors
Total Investment Present Value
Construction Equipment Installation Other
Year 0 $ 4,500,000 $ 450,000 $ 4,950,000 1 $ 4,950,000
Year 1
Year 2
Year 3
Year 4
Total $ 4,500,000 $ 450,000 $ 4,950,000 $ 4,950,000
Benefit Present Value
Present Value Factors
Revenue Increases Revenue Decreases Expense Decreases Expense Increases Total Benefit Present Value
Year 1 1,125,000 312,000 1,437,000 0.93 1,336,744
Year 2 1,350,000 312,000 10,000 1,652,000 0.865 1,429,529
Year 3 1,575,000 312,000 10,000 1,877,000 0.805 1,510,911
Year 4 1,800,000 312,000 10,000 2,102,000 0.749 1,573,979
Year 5 2,025,000 312,000 10,000 2,327,000 0.697 1,620,892
Total 7,875,000 1,560,000 40,000 9,395,000 7,472,055
Net Present Value 2,522,055
Benefit/Cost Ratio 1.51
Total Cash Inflow 9,395,000
Average annual cash inflow 1,879,000
Average payback period (in Years) 2.6
Return on investment = Average Annual Return / Average Investment
= ( Total Benefit / Total Years ) / (Investment / 2)
= ( $9,395,000 / 5 ) / ( $4,950,000 / 2 )
= $1,879,000 / $2,470,000
= 76%

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