Basic Data (2)
Posted on April 18, 2009 - Filed Under Finance
Table 5.3 categorizes the clinic’s total costs of $7,080,962 into two components: total variable costs of $2,113,500 and total fixed costs of $4,967,462. These cost amounts are fundamentally different, both in quantitative and qualitative terms. The total fixed costs of $4,967,462 must be borne by the clinic regardless of the actual volume in 2005. However, total variable costs of $2,113,500 apply only to a volume of 75,000 patient visits. If the actual number of visits realized in 2005 is less than or greater than 75,000, total variable costs will be less than or greater than $2,133,500. (Of course, this is the primary reason that costs are classified as fixed and variable in thefirst place.)
When an organization’s costs are expressed in this way, it is easy to see that higher volume leads to higher total costs. Atlanta Clinic’s underlying cost structure is plotted in Figure 5.3. (To simplify the graph, we assume that the relevant range extends to zero visits.) As first illustrated in Figure 5.1, fixed costs are shown as a horizontal dashed line and total costs are shown as an upward-sloping solid line with a slope (rise over run) equal to the variable cost rate—$28.18 per visit. Unlike Figure 5.1, the graphical presentation has been simplified by not showing total variable costs as a separate line starting at the origin. Of course, total variable costs are represented in Figure 5.3 by the vertical distance between the total costs line and the fixed costs line.
Taken From : HEALTHCARE FINANCE
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