Commonwealth Orthopedics, a private orthopedic practice in Newport
News, Virginia, has decided to expand its physical therapy services by
opening a physical therapy center. Three site options for the center are
currently under consideration: (1) a property lease at Heritage Medical
Park, (2) a joint venture investment in a property in Towne Center, and (3)
purchase of an existing practice in East End.
Average payment for physical therapy services is $90 per visit. Variable
costs are projected to be $35 per visit for all locations under
consideration. Fixed costs at the Heritage Medical Park are expected to
be $425,000; fixed costs for the Towne Center investment are expected
to be $361,608; fixed costs for the existing practice in East End are
$328,302.
a. How many visits are necessary at each location to break even (realize
$0 in profits)?
b. If expected visits are 13,700, 13,250, and 12,500 for locations A, B,
and C, respectively, which location should be chosen based on total
cost?
c. If expected visits are 13,700, 13,250, and 12,500 for locations A, B,
and C, respectively, which location should be chosen based on total
profits?
d. Determine the sensitivity of the decision in part (c) to a +/–20 percent
fluctuation in visits.