IN

ACCT 201B

Managerial
Accounting

Spring
2015

ItwasBoomTown,theWildWest!Whateverit
wascalledLosSantoswasanotherwordfor
opportunity!

ACCT 201B
Case # 03:

Breakeven Analysis
& CVP

Course
Instructor:

Randy Hoffman

~75points~
DueBeginningofClass
Thursday,March05
Interimsubmissiondueviaemail 3/3endofclass

Case # 03 PART A
Los Santos Urgent Care Ctr
A GTA International Company
Due Beg of Class Thurs, 3/05
Interim submission due Tues 3/3/15

Hoffman
Spring 2015

Michael De Santa, Trevor Philips and Franklin Clinton were long-time friends.
They attended Los Santos High School where they played football together and
were heavily recruited by a wide variety of Division 1 schools. They stayed in
touch while attending separate universities and after graduation they all
eventually relocated back to the land of
opportunity, the City of Los Santos.
All three
had an entrepreneurial spirit and together they
built a strong import/export business, GTA
International.
When Michael took his daughter to the Los
Santos Regional Medical Center Emergency
Room late one evening for an inter-ear infection
the wait time to see a doctor was more than four
hours. The long wait time was because the
The City of Los Santos was a rapidly
more serious medical issues (auto accident
growing metropolis, similar to its sister city
victims, gunshot wounds, drug overdoses, heart
of Gotham. Some called it the Wild West
attacks, etc.) were treated first. When he spoke
but whatever it was called it was the land
of opportunity for many.
with others who were waiting to see a doctor,
Michael discovered the average wait time for a
non-life threatening medical issue was more than four hours. He concluded
there might be a high demand for reasonably priced medical services for non-life
threatening conditions on an urgent basis.
Michael and his partners knew they would not dominate the import/export
business in Los Santos forever and
were looking for opportunities to
diversify their holdings. In order to
determine the feasibility of establishing
the Los Santos Urgent Medical Center,
the partners hired Booz Allen to assist
with market projections. The results of
this study showed that if GTA
International
spent
$980,000
on
advertising the first year, the number of
new patients expected each day would
be 50. After much discussion during
their regular Wednesday round of golf
the partners believed this number was
Many claim more deals are done over a
reasonable and decided to proceed.
round of golf than anywhere else. The Los
Santo Country Club was GTA International s
birthplace.

Case # 03 PART A
Los Santos Urgent Care Ctr
A GTA International Company
Due Beg of Class Thurs, 3/05
Interim submission due Tues 3/3/15

Hoffman
Spring 2015

After the golf round they had lunch in the club house to hammer out the basic
operating guidelines which included:

With the intent to provide access to those who may not have health insurance
and were in need of urgent but non-life threatening medical care they decided
to keep the urgent care center open 360 days per year. The center would be
open from 7:00 AM until 11:00 PM to provide convenient access for as many
people as possible.

For each of the two eight hour shifts the urgent center would be staffed by a
doctor, a nurse, a nurses aide and a receptionist.

The only charge to each new patient would be $60 for a standard visit to see
the doctor.

The partners estimated that

20% of the patients would
require some sort of continued
care. They felt the average
total fees would be $4,000 for
the follow-up care of which
they would likely recover 30%
from the insurance companies
and write off the rest. It is not
expected that there will be
repeat patients during the first
year of operations.

This corner location was perfect for their first

urgent center and at $56 per sq. foot annually
was a great price considering the high rents
in Los Santos.

The hourly wages of the staff were projected to be:

Staff Member
Doctor
Nurse
Nurse Aide
Receptionist

Hourly Rate
$50
$40
$30
$20

In order to retain the best staff the partners decided to offer them a premium
fringe benefit plan which would likely be about 40 percent of all wages paid,
including any overtime paid. The partners believed that about 400 hours of
overtime would be worked during the first year; divided equally between the
nurses aide and the receptionist positions. Overtime would be paid at one
and one-half times the regular wage.

Case # 03 PART A
Los Santos Urgent Care Ctr
A GTA International Company
Due Beg of Class Thurs, 3/05
Interim submission due Tues 3/3/15

Hoffman
Spring 2015

GTA Intl had located a 6,000 square feet consumer store which had lost its lease
and could be occupied immediately. It required few modifications and went for
$56 per square foot annually.
Related expenses of $54,000 for property
insurance and $74,000 for utilities were estimated for the first year.

Due to the significant number of attorneys living in Los Santos they expected to
be sued fairly often and therefore it would be necessary to purchase medical
malpractice insurance which was expected to cost $360,000 annually.

The initial investment in the office equipment would be $120,000. This equipment
has an estimated useful life of four years.

The cost of office supplies was been estimated to be $8 per expected new
patient visit.

PART A Requirement (show all of your work or no credit will be given for the answer.)
1) Prepare a contribution margin income statement for the first year of operations using the
partners assumptions.
2) From the income statement in (1) above:
a. How many new patients are expected in the first year?
b. What is the Urgent Centers contribution margin ratio?
c . What is the contribution margin per patient?
3) What is the Urgent Centers breakeven point?
a. Number of patients.
b. Total dollars
4) What is the Urgent Centers:
a. Margin of safety in dollars?
b. Margin of safety ratio?
5) Calculate the Urgent Centers
a. Degree of operating leverage
b. What will the net income be if sales grows 7.5%
6) What will the Urgent Center net income be if their new patient estimate is wrong and:
a. They have 1,500 more patients than originally forecasted
b. They have 367 less than originally forecasted
7) How many new patients will the Los Santos Urgent Center need to earn a target profit of
$1.5 million in the first year of operation?
8) Assume that Los Santos Urgent Clinics estimate of equipment needed was low by $80,000
and they purchased additional equipment on July 1 and at the same time raised the
examination fee by $2.5 per patient (Assume new patients are acquired evenly through the
year.) what was would be the centers new net income
Interim Submission Due Via Email Tuesday, March 03 (Req 1-3)

Case # 03 - Part B
Breakeven Analysis

GTA Collection Agency

Hoffman
Spring 2015

A GTA International Company

Due to the nature of the business, bad debts experienced in the import/export industry
were exceptionally large. Firms which werent diligent in collecting past due amounts
would generally go out of business soon after they opened their doors. Recognizing
this from the beginning, the GTA International partners had established their own
collection agency and had the
lowest write off rate in the
import/export industry. They were
so good at collecting their past due
amounts they started to do it for
other companies and had a list of
very impressive and happy clients.
The collection division headquarters
was based in Chicago for its central The executives i n the Collection Division based in
location and the versatility of OHare Chicago always enjoyed visiting GTA Internationals
Airport. There always seemed to be corporate headquarters based in sunny Los Santos
a flight leaving almost anytime going -- - especially during the winter months
to most everywhere which facilitated
a rapid deployment should corporate resources be needed at the collection site.
The following is the budgeted income statement for the coming year prepared by Luca
DeCenzo, the companys controller. The Costs of Collections should be treated as
100% variable.
GTA Collection Agency
Budgeted Income Statement

Sales
Costs of Collections
Gross Profit
Selling & Admin Exp
Commissions
Support Personnel
All other expenses
Net Income

$
$

3,000,000
855,000
150,000

15,000,000
9,000,000
6,000,000

4,005,000
$

1,995,000

The Collections Division contracted with independent collection agencies and paid them
20% of the recovery. The independent agencies felt they should receive 25% in the
coming year as a reward for making GTA Collections Agency one of the most
successful in the business.

Case # 03 - Part B
Breakeven Analysis

GTA Collection Agency

Hoffman
Spring 2015

A GTA International Company

For several years the GTA partners had been discussing the possibility of employing
their own collection teams and firing the agencies. As result of these last minute
demands they are seriously considering implementing this change and believe the
following are the costs associated with hiring their collection teams as direct employees:
Collection Team 1

Fixed Costs
$
125,0000

Collection Team 2

240,000

Variable Costs
+ 5% of sales
N/A

All other fixed costs, as well as the variable cost percentages, would remain the same
as the estimates in the budgeted income statement.

PART B Requirements: (Show your work or no credit will be given)

1. Compute the breakeven in sales dollars using the budgeted income statement.
2. Compute the breakeven in sales dollars meeting the agencies demands.
3. Compute the breakeven in sales dollars assuming the collection teams are hired
directly..