Volume risk and price variances

Revenue

Group Revenue

In the given scenario, one thousand hours of part-time nursing services were purchased at a total cost of $40,000. It was expected that these nurses would provide a total of four hundred flu shots, for which the group expects to receive an average of fifty dollars per shot, total flu shot revenue of twenty thousand dollars. It was also expected that these nurses would treat sixteen hundred flu patients, for an average charge of eighty dollars and a total of one-hundred-and-twenty-eight thousand in revenue from flu patient treatment. Total expected revenues, then, were one-hundred-and-forty-eight thousand dollars, or one-hundred-and-eight thousand after the part-time nurses providing these services were paid (this number still does not represent expected profits, as it does not account for any other costs associated with the provision of these services). In actuality, the nurses hired by the group administered twelve-hundred flu shots with an average charge of fifty-five dollars, or sixty-six thousand in revenue, and treated fourteen hundred flu patients with an average charge of seventy dollars, or ninety-eight thousand in revenue. Total revenue was one-hundred-and-sixty-four thousand dollars, or one-hundred- and twenty-four thousand less the cost of the nurses.

The volume variance in this scenario is forty thousand dollars for the flu shots and negative sixteen thousand for the treatment of flu patients, which shows that at the budgeted prices the variances in volume would still have been more profitable for the medical group than the expected business and service levels. In other words, the volume increase in the administering of flu shots more than made up for the volume decrease in the treatment of flu patients.

This holds true even when the price variance is calculated; the reduction in volume of the number of flu patients seeking treatment actually means that the reduction in revenue from these services impacted the medical group slightly less than it would have at the expected volume, and the slight increase in revenue-per-flu shot was compounded by the three-fold increase in expectations in the number of flu shots administered. For flu shots, this price variance was six thousand, and for the treatment of flu patients this variance comes in at fourteen thousand (technically, negative fourteen thousand, as the group would have made this much more had they been able to collect the full eighty dollars expected from every flu patient treated). These figures show that the price changes alone, had they not been accompanied by significant volume changes, would have led to a situation of reduced profitability when compared to expectations, as the reduction in the price for the flu patients is greater than the increase in price that the group achieved with flu shots.