You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follow:
Revenues (10,000 visit) $400,000
Wages and benefits $220,000
Rent $5,000
Depreciation $30,000
Utilities $2,500
Medical supplies $50,000
Administrative supplies $10,000
Assume that all costs are fixed, expect supply costs, which are varible. Futhermore, assume that the clinic must pay taxes at a 30 percent rate.
a. Construct the clinic's projected P&L statement.
b. What number of visits is required to break even?
c. What number of visits is required to provide you with an after-tax profit of $100,000.
To construct the projected Profit and Loss (P&L) statement for the clinic's first year of operations, we need to calculate the various expenses and determine the net profit.
a. P&L Statement for the Clinic's First Year of Operations:
Revenues:
Number of visits: 10,000
Revenue per visit: $400,000 / 10,000 = $40
Total Revenue = Number of visits x Revenue per visit = 10,000 x $40 = $400,000
Expenses:
Wages and benefits: $220,000
Rent: $5,000
Depreciation: $30,000
Utilities: $2,500
Medical supplies (variable): $50,000
Administrative supplies: $10,000
Total Expenses = Wages and benefits + Rent + Depreciation + Utilities + Medical supplies + Administrative supplies
Total Expenses = $220,000 + $5,000 + $30,000 + $2,500 + $50,000 + $10,000
Total Expenses = $317,500
Net Profit Before Taxes = Total Revenue - Total Expenses = $400,000 - $317,500 = $82,500
Taxes:
Tax rate: 30%
Taxes = Net Profit Before Taxes x Tax Rate = $82,500 x 0.30 = $24,750
Net Profit After Taxes = Net Profit Before Taxes - Taxes = $82,500 - $24,750 = $57,750
b. To calculate the number of visits required to break even, we need to find the point where costs equal revenues, resulting in zero profit.
Break-even point:
Revenue per visit: $40
Total Fixed Costs = Wages and benefits + Rent + Depreciation + Utilities + Administrative supplies
Total Fixed Costs = $220,000 + $5,000 + $30,000 + $2,500 + $10,000
Total Fixed Costs = $267,500
Variable Costs = Medical supplies
Variable Cost per visit = Medical supplies / Number of visits = $50,000 / Number of visits
Equation for Break-even:
Number of visits x Revenue per visit = Total Fixed Costs + Variable Cost per visit x Number of visits
Solving for Number of visits:
Number of visits x $40 = $267,500 + Variable Cost per visit x Number of visits
$40 x Number of visits = $267,500 + $50,000
$40 x Number of visits = $317,500
Number of visits = $317,500 / $40
Number of visits = 7,937.5
Therefore, the number of visits required to break even is approximately 7,938.
c. To determine the number of visits required to provide an after-tax profit of $100,000, we need to adjust the equation above.
Equation for After-tax Profit:
Number of visits x Revenue per visit - Total Fixed Costs - Variable Cost per visit x Number of visits = After-tax Profit
Solving for Number of visits:
Number of visits x $40 - $267,500 - Variable Cost per visit x Number of visits = $100,000
$40 x Number of visits - Variable Cost per visit x Number of visits = $100,000 + $267,500
(Number of visits x $40) - (Variable Cost per visit x Number of visits) = $367,500
$40 - Variable Cost per visit = $367,500 / Number of visits
$40 - (Medical supplies / Number of visits) = $367,500 / Number of visits
We will need additional information or assumptions about how the variable cost per visit changes with the number of visits to further solve for the required number of visits to achieve an after-tax profit of $100,000.
a. To construct the projected P&L statement, we need to calculate the total expenses, pre-tax profit, and net profit.
Total Expenses:
Wages and benefits: $220,000
Rent: $5,000
Depreciation: $30,000
Utilities: $2,500
Medical supplies: $50,000
Administrative supplies: $10,000
Total Expenses = $220,000 + $5,000 + $30,000 + $2,500 + $50,000 + $10,000 = $317,500
Pre-tax Profit:
Revenues: $400,000
Total Expenses: $317,500
Pre-tax Profit = Revenues - Total Expenses = $400,000 - $317,500 = $82,500
Taxes:
Tax Rate: 30%
Taxes = Pre-tax Profit * Tax Rate = $82,500 * 0.30 = $24,750
Net Profit:
Pre-tax Profit: $82,500
Taxes: $24,750
Net Profit = Pre-tax Profit - Taxes = $82,500 - $24,750 = $57,750
Projected P&L Statement:
Revenues: $400,000
Expenses:
Wages and benefits: $220,000
Rent: $5,000
Depreciation: $30,000
Utilities: $2,500
Medical supplies: $50,000
Administrative supplies: $10,000
Total Expenses: $317,500
Pre-tax Profit: $82,500
Taxes: $24,750
Net Profit: $57,750
b. To calculate the number of visits required to break even, we need to divide the total fixed costs by the revenue per visit.
Fixed Costs: Wages and benefits + Rent + Depreciation + Utilities + Administrative supplies
Fixed Costs = $220,000 + $5,000 + $30,000 + $2,500 + $10,000 = $267,500
Revenue per Visit: Revenues / Number of Visits
Revenue per Visit = $400,000 / 10,000 = $40
Break-even visits = Fixed Costs / Revenue per Visit = $267,500 / $40 = 6,687.5
Therefore, the number of visits required to break even is approximately 6,688.
c. To calculate the number of visits required to provide an after-tax profit of $100,000, we need to adjust the target profit for taxes and divide it by the revenue per visit.
Target Profit after Tax: $100,000 / (1 - Tax Rate)
Target Profit after Tax = $100,000 / (1 - 0.30) = $100,000 / 0.70 = $142,857.14
Profit per Visit (before taxes): Target Profit after Tax / Number of Visits
Profit per Visit = $142,857.14 / 10,000 = $14.29
Break-even visits for after-tax profit = Fixed Costs / (Revenue per Visit - Profit per Visit)
Break-even visits = $267,500 / ($40 - $14.29) = $267,500 / $25.71 = 10,408.88
Therefore, the number of visits required to provide an after-tax profit of $100,000 is approximately 10,409.