You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows:
Number of Visits 10,000
Utilities $2,500
Wages and Benefits $220,000
Medical Supplies $50,000
Rent $5,000
Administrative Supplies $10,000
Depreciation $30,000
Assume that all costs are fixed except supplies costs, which are variable.
a. What is the clinicâs underlying cost structure?

A. Clinic’s underlying cost structure => Fixed Cost + Variable Cost * (Volume) Fixed Cost => Rent + Utilities + Wages and Benefits + Depreciation => 5,000 + 2,500 + 220,000 +30,000. Fixed Cost = $257,500

Variable Cost=Medical Supplies + Administrative Supplies= 50,000+10,000.

=$60,000.

B. Clinics Expected Total Cost= Fixed Cost + Variable Cost=$257,500 +$60,000= $317,500.

C. Clinic’s Estimated Total Cost at 7,500 visits= Fixed cost (5,000 + 2,500 + 220,000 +30,000) + Variable cost=(50,000/10,000)*7,500 +(10,000/10,000)*7,500 =$257,500 + 35,500+7,500=$300,500.

D. Average cost per visit at 7,500, 10,000 and 12,500 visits

i. Average cost per visit at 7,500 = 300,500/7,500=$40.07

ii. Average cost per visit at 10,000 = 317,500/10,000=$31.75

iii. Average cost per visit at 12,500= Fixed cost + Variable cost

= $257,500 + (5*12,500+1*12,500) =$332,500

=$332,500/12,500=$26.60

Explanation:

Fixed costs will remain the same irrespective of the number of visit.

Variable costs depend on the number of visit.