Medi-Exam Health Services, Inc. (MEHS), located in a major metropolitan area, provides annual physical screening examinations, including a routine physical, EKG, and blood and urine tests. MEHS’s clients are companies offering annual physicals for their employees, but which are too small to warrant having a full-time medical staff of their own to provide this service. MEHS has its own portable equipment, which it moves from client to client so the examinations can be done at the customer’s facilities. MEHS also has its own central laboratory for obtaining test results. A standard examination is priced at $160 per patient.
While conducting examinations for Peterson Electronics Company, Dr. James Molloy, one of the owners of MEHS, began talking with Peterson’s head of financial planning. The patient told Dr. Molloy how Peterson used a profitgraph to help indicate the approximate profit the firm could expect to earn at various levels of output.
At the next meeting with MEHS’s accountant, Jane Mattick, Dr. Molloy asked if such a technique would be useful for MEHS. Ms. Mattick said she would draw up a profitgraph for 500 physicals, a normal month’s number of examinations. Her chart appears in Exhibit 1.
On September 1 Dr. Molloy learned that 310 physical examinations had been billed in August. Using the chart, he determined that profit should be approximately $6,000 for August. On September 8 Dr. Molloy received a copy of the income statement for August, showing a book profit of $10,000 (Exhibit 2).
Although he was pleasantly surprised by these results, Dr. Molloy was curious as to why the pretax profit was approximately 70 percent higher than he had expected, based on the profitgraph.
Assignment
- Compute the monthly breakeven volume for Medi-Exam Health Services.
- Compute the exact profit indicated by the profit graph for a volume of 310 examinations.
- Determine the number of examinations performed (as opposed to billed) in August
- Reconcile the profit just computed with the August book profit of $10,000.