for Your Consideration Underlying Cost Structure and Relevant Range In general, an organizations...
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Finance
for Your Consideration
Underlying Cost Structure and Relevant Range
In general, an organizations underlying cost structure is defined for a specified relevant range. For example, Atlanta Clinics underlying cost structure is given as follows:
Total costs = Fixed costs + Total variable costs
= $4,967,462 + ($28.18 x Number of visits),
and the relevant range for this structure is 65,000 to 85,000 visits.
Now, assume that a new payer makes a proposal to the clinic that would increase next years volume by 15,000 visits, which would increase the expected number of visits to 90,000. The financial staff presents you, the CEO, with an analysis of the proposal that uses the above cost structure. For example, total costs were calculated as follows:
Total costs = $4,967,462 + ($28.18 x 90,000)
= $4,967,462 + $2,536,200
= $7,503,662
What is your initial reaction to the analysis? Is it valid, or must it be redone? What variable in the total costs calculation is most likely to change?
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