South University Savannah Week 3 Business Marketing Management Discussion

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Business Finance

South University Savannah

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Review the CVP-graph PDF for more information on CVP graphs and how to read them. Assuming the graphs are drawn to the same scale, consider the break-even charts—cost-volume-profit (CVP) graphs—below for two competing providers operating in a fee-for-service environment. On the basis of your understanding of variable cost rate, per-unit revenue, contribution margin, fixed costs, and the CVP graphs above, answer the following questions:

Explain how the CVP graphs would change if the providers were operating in a discounted fee-for-service environment.

Explain how the CVP graphs would change in a capitated environment. Evaluate which provider is in the best position to grow its business.

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CVP-graph © 2016 South University (VP-graph Now that we've explored cost behavior and taken a look at breakeven analysis, profit analysis and the contribution format income statement, let's spend a few minutes looking at this in a graphical presentation. What I've done here is I've created two firms; firm X and firm Y and these firms have different cost structures. So notice that firm X has a $40 sales price per unit, $25 variable cost per unit and that leaves it with a $15 contribution margin per unit, taking a look at firm Y we have that same sales price of $40, however we only have a $10 variable cost per unit which leaves us with a contribution margin of $30. Also notice that firm X has fixed cost of $18,000 while firm Y has fixed cost of 30,000. Now what we are seeing here is a tradeoff and this is usually a tradeoff between labor and automation, IE machinery. So just looking at these numbers we can probably say that firm Y is more automated than firm X. They have higher fixed cost from that machinery and they've reduced their variable cost per unit by eliminating some of their direct labor. Firm X however has lower fixed costs but higher variable cost per unit, so they probably have a higher amount of direct labor cost built into their cost structure. Let's take a look at the graph, this top line I've labeled total revenue and the way I calculated that was I had a range of Oto 2000 unit sold and I simply did some multiplications, so 2000 times my 40 dollar unit cost gave me this point at 80,000. So the coordinates are 2000, 80000 on this top coordinate and then off course if we sell zero units we would have zero revenues, so that describes the total revenue line. This line is horizontal line is my total fixed cost line and we see that comes right in 18000 for Firm X. The middle line is my total cost line. Now that includes fixed and variable cost and look where it starts out, it starts out at 18000 that's my fixed portion and then it continues up at a slope and that slope is $25 per unit. That's my variable portion. Now where these lines intersect is the breakeven point and I've calculated the breakeven point up here just to exemplify this and if you look at this and follow it down it winds up at the 1200 unit level on the x-axis. Let's take a look at Firm Y, I calculated the lines the same way and look where the total revenue and total cost line meet that's the breakeven point that makes sense doesn't it? If total revenues are equal to total costs and your net operating income is going to be zero. So I've got a 1000 unit breakeven point there it is, right there on the x-axis and Page we 2 of 3 can also see my breakeven point in dollars of 40000 points up ovFinancial er here on Management the of y-axis, Healthcare right at Organizations40000. ©2016 South University Let's take a look at these triangles that will be described by the total revenue and the total cost line. We have got a triangle above the breakeven point and we call this triangle the area of profit. Below the breakeven point the triangle described by the total revenue and the total cost line is called the * SCTheAccountant. (2013). CVP-graph [Video]. Available from https://www.youtube.com/watch?v=7T7EH3t8SJU
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The connection between revenues, costs, profits, and sales volume can be graphically
represented by drawing a break-even chart or a cost-volume-profit (Hutt & Speh, 2012). CVP
graphs highlight the relationships among costs, volumes, and profits over a wide variety of
activities and can offer top executives perspectives that can be acquired in no other ways. In CVP
graphs, at times known as break-even charts, dollars are usually represented on the vertical (Y)
axis while volume is presented on the horizontal (X) axis. The total revenue line slope would still
slope upwards if the operations of the providers were discounted fee-for-servic...


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