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Income statement


1. What is an income statement used for?

Income statement is majorly used to measure the profitability of an entity. This can be done monthly, quarterly, half year or annually. The information on the income statement helps managers to make major decisions since they are able to know how effective the company operations are, the underperforming sectors of the entity and how the business is in comparison with other firms in the industry. The management are able to control the course of their activities. For example, a department that is not generating income as its intended can be discontinues or measures be put in place to turn it to be productive as expected (saylor, nd).

2. What are the key components of an income statement?

The key components of an income statement are; sales revenue, expenses and profit or loss. The sales revenue or the income refers to all the sales the entity made during the given financial year. This includes both cash and accrual revenue. In a health care facility, revenue (which include; net patient revenue, premium revenue and other revenues) entails all the income an entity received from the sales of its services and income from other sources that are not medical in nature, for example, investments dividends. The expenses are the amount an entity incurs in order to offer its services and it can be divided into two; cost of goods sold and operating expenses. The profit or loss is the bottom-line of the income statement. It does not stand on its own since it is the residual of revenue and expenses (wiki accounting, nd).

3. On your example of an income statement, is the organization making a profit or loss? How much is that profit or loss? Show the calculations. (Total Revenues – Total Expenses = Net Profit/Loss)

The below calculation show that Dehew Healthcare is making a profit.

This is total revenue calculation;

Gross Patient Revenue $30,981,629

Premium Revenue $65,882

Other Revenue $289,856

Total revenue $31,337,367

This is total expenses calculation;

Cost of goods/services sold (COGS)

Contractual Allowances $14,995,326

Charity Care $1,735,909

Provision for Bad Debt $641,786

Total COGS $17,373,021

Operating expenses

Salaries and wages $8,925,000

Employee benefits expenses $290,000

Supplies expense $81,930

Purchased services $21,163

Purchased outside services $15,598

Facilities expense $462,882

Other operating expenses $324,448

Intrasystem allocation $750,000

Total Operating System $10,871,021

Total Expenses $28,244,042

Net Profit/Loss = Total Revenues – Total Expenses

Net Profit/Loss = $31,337,367 - $28,244,042

Net Profit/Loss = $3,093,325

Since the figure above is positive then it’s a profit, also revenue is greater than expenses.

4. On your example of an income statement, what is the “total contribution margin”? Show the calculations. (Net Sales – Total Variable Costs=Total Contribution Margin). You can use the assumption that volume is 15,000 if not included in financial statements.

Contribution margin refers to business sales minus its variable costs. The resulting figure is used to cover the fixed costs and what is left after covering fixed costs is the business earnings. Contribution margin presented as total contribution margin is calculated as follows;

Total Contribution Margin = Net Sales – Total Variable Costs

Calculations,

NB: each figure from the given income statement is divided by unit of service which is 40,800, (for example net sales is total net revenue / unit of service, that is 13,964,346/40,800=342)

Net sales per unit revenue $342

Variable Cost

Employee Benefits Expenses $7

Purchased Services $1

Purchased Outside Services $0

Other Operating Expenses $8

Intrasystem Allocation $18

Supplies Expense $2

Total variable cost per unit $36

Contribution margin

Contribution margin per unit = net sales per unit -total variable cost per unit

= $342 - $ 36

= $306

Total Contribution Margin = $306 * 40,800 (units of services)

= $ 12,484, 800

5. What three financial indicators does a contribution margin help determine? How?

The three financial indicators that contribution margin help to determine are;

· Product to continue or stop producing; only products with positive contribution margin are worth remaining in the products portfolio. The products with a negative contribution margin should either be stopped or their variable costs be adjusted such that they become profitable.

· Break-even point; an entity is able to know the volume of units that must be sold for the entity to break even, that is, the business to be able to cover all its costs (CFI, 2021).

· Set the price threshold; if a product has a negative contribution margin it means it is not able to cover its fixed costs and contribute to profit. An entity can decide to adjust the price of a product upward, instead of doing away with product production, in order to be able to cover all the costs.

6. What is a break-even analysis? What is the break-even point for this organization? List expenses assigned as variable and fixed. Show the calculations. (Total revenues - Total VC – Total FC= Profit).

Break-even point

Break-even point is when Revenue = Total Variable cost + Total Fixed cost. At this point the business doesn’t make profit or loss.

Break-even point units= Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

But, (Sales price per unit – Variable costs per unit) is the same as contribution margin per unit

Therefore, Break-even point units= Fixed Costs ÷ contribution margin per unit

Fixed costs

Salaries and Wages $8,925,000

Facilities Expense $462,882

Total fixed cost $9,387,882

From question 4 contribution margin per unit is $306, hence;

Break-even point units= Fixed Costs ÷ contribution margin per unit

= $9,387,882 / $306

= $ 30,679

Proof

Break-even point sales = net sales per unit * break-even point units

= $342 * 30,679

= $10,503,441.89

Fixed cost 9,387,882.00

Variable Cost 1,115,559.89

Total Variable cost + Total Fixed cost 10,503,441.89

Based on 40,800 units of service, profit =

Total Net revenue 13,964,346.00

Total Variable cost 1,483,139.00

Total Fixed cost 9,387,882.00

Profit 3,093,325.00

7. How does a break-even analysis vary between fee-for-service and capitated payments? Explain it using the income statement you chose. What are the similarities and differences applicable to the Income statements in fee-for-service and capitated payment options?

In fee-for-services break-even analysis can be done like in any other business situation since the patients are charged according to the services they consume. In this case it is possible to have unit of services with variable costs. On the other hand, capitation method pays a provider a fixed amount for the services that will be offered; whether consumed or not. In this case, all the services are generalized. In break-even analysis it is difficult to get contribution margin per unit.

In a capitated method revenue is fixed and therefore only volume and variable cost can be controlled. Therefore,

Profit = revenue-expenses

But revenue = (charge*volume)

And expenses = (fixed cost) + (variable cost per unit *volume)

To break even the business will need either to increase volume or play well with the variable cost.
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