Business Math for Pharmacy Technicians

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Chapter 15

Business Math for Pharmacy Technicians

John L. Fulcher, CPA

Objectives

• Calculate overhead expenses for a specified period of time including calculating annual depreciation

• Calculate prescription markup or gross margin

• Calculate discounts on merchandise

• Calculate gross profit for a specified period of time

• Calculate net income

• Calculate insurance reimbursement using average wholesale prices and capitation fees

• Manage inventory including par levels and inventory turnover rate

• Perform a daily cash report

Key Words

Pretest

Perform the following business math calculations. Round answers to the nearest tenth or dollars and cents as appropriate.

1. A pharmacy sells a prescription for $43.50. The medication costs the pharmacy $22.65.

2. A pharmacy buys a medication at a discount rate of $555 for 1000 tablets. The selling price for the medication is $45.50 for 50 tablets.

3. A customer brings in a discount coupon for 25% off the first prescription and 10% off the second prescription. One prescription costs $15 while the other costs $24.50. The pharmacist tells you to take the 25% off the most expensive prescription.

4. A pharmacy has a monthly income of $535,356 with inventory purchases of $456,980, salaries and wages of $76,000, and maintenance costs of $1567.50.

5. What would be the percentage markup based only on cost of a prescription that has an inventory cost of $14.50 and is sold for $21? ___________________

6. A pharmacy buys a new computer program for $9500 in January. The expected time of use is 3 years and will be discarded at the end of 3 years.

7. A pharmacy has a reorder level of 2500 capsules for antibiotic during the winter influenza season. The pharmacy technician checks inventory today and finds 950 capsules are still available as inventory. The wholesaler has a deal for 5000 capsules for $1500 with a 10% discount. The average use of the capsules is 3000 capsules per week.

8. A pharmacy is contracted with an insurance company for a reimbursement of AWP plus 15% and a dispensing fee. The prescription costs the pharmacy $12.50. The dispensing fee is $7.50.

9. The pharmacy is contracted with another insurance company for reimbursement based on capitation for the medication found in question 8. The capitation fee is $45 per month for this patient. The patient has already received a prescription for $16.50.

10. A pharmacy has an opening cash drawer of $150. At the end of the day the purchases are $1895.67. The drawer contains $14.50 in coupons, discounts of $12.50, refunds of $13.50, and credit card purchases of $45.60.

Introduction

Pharmacy technicians in retail settings, as well as in hospital settings, must know how to perform some basic business calculations. For a business to remain profitable, the net income, or net profit, derived from the sales of medications must exceed the costs for doing business. The mathematical calculations may include using percentage to find discounts and markups as well as addition and subtraction to obtain the necessary par level for inventories and evaluate the financial picture for the overall business. The pharmacist(s) in charge must be sure that an adequate markup is in place so the receipts of the business are in excess of the expenses and that the supply of inventory is adequate to cover demand but not so excessive that it would tie up the cash flow of the business with stale or unwanted merchandise on the shelf. The monitoring of pricing and inventory, as well as obtaining the necessary inventory levels, may become a task of the pharmacy technician, who, therefore, has the responsibility of arriving at the actual profit of the pharmacy. The cash flow of the pharmacy is directly related to the mathematical calculations performed for inventory and profit (or loss) that are calculated on a routine basis. Therefore, costs of new inventory must be carefully checked each time the stock arrives to be sure cost of the stock has not changed since the last order. If inventory prices change and the basic costs or prices for sales are not changed simultaneously, profits will be affected. As a pharmacy technician, you have a major role in inventory control and reorders that affect turnover rates, overhead, and gross/net profits.

Overhead Expenses

In business, the receipts from sales must exceed the overhead for doing business for the retailer to be profitable. Overhead is the actual cost of doing business. It includes all costs for the pharmacy such as salaries, equipment purchases and repairs, utilities, telephone, insurance, and rent—those expenses that are required for the business to operate efficiently. The net profit for the pharmacy is based on the gross profit less the overhead. Overhead should be kept to a minimum while still providing quality services for the customers. As equipment, building, and the like age, the value is lessened by depreciation expense.

Depreciation

Depreciation represents the decrease in value of an asset (equipment, building, fixtures) based on the age related to the asset and the expected time the asset is to be used. For example, a computer is bought for $1000 to be used for 5 years. The amount to depreciate is $1000 taken over 5 years as part of the overhead. If the depreciation is taken as equal value over all years, the amount would be $200 per year.

< ?xml:namespace prefix = "mml" />Annual depreciation=Cost÷Estimated time of use

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To calculate overhead, the total of all business expenses should be added together.

Example 15-1

A pharmacy spends $12,585 for inventory for a week; the salaries for all persons involved are $12,500. The rent is $1600 per month, and utilities cost $800 per month. In addition, the costs for insurance are $1000 per month, and depreciation on equipment is $2500 per month. Taxes are $2400 per month. What is the overhead for each week?

Inventory $12,585
Salaries 12,500
Rent 400 ($1600 ÷ 4 weeks/month)
Utilities 200 ($800 ÷ 4 weeks/month)
Insurance 250 ($1000 ÷ 4 weeks/month)
Depreciation 625 ($2500 ÷ 4 weeks/month)
Taxes 600 ($2400 ÷ 4 weeks/month)
Total overhead $27,160/week

Practice Problems A

Calculate the overhead in the following problems. Be careful to read entire problems. Show your calculations. All final answers should be shown in dollars and cents.

1. A pharmacy has a monthly cost for medication inventory of $46,725, salaries of $58,000, utilities of $2534, rent of $770, insurance of $1575, taxes of $7844, depreciation of equipment of $965, and business supplies and postage of $650.

2. A hospital pharmacy is asked to calculate the overhead necessary to maintain safety for the patients when medications are dispensed. The following amounts would be necessary per year: salaries for pharmacists—$264,000; four pharmacy technician salaries—$22,500 each; medication inventory—$56,525 each month; utilities—$750 per month; salaries for relief pharmacists—$12,500/year; computers and software updates—$56,000 yearly; yearly liability insurance for pharmacists and pharmacy technicians—$3500; and use of hospital space—$3600/year.

3. A pharmacist needs to know how much income each month is necessary to meet the overhead for the business he owns. The expenses are salaries of $72,000 per year for the pharmacist, $27,500 per year each for two pharmacy technicians, $560,430 per year for inventory costs, $5600 per year for utilities and rent, $27,500 per year for equipment replacement, and taxes and other business expenses of $1560 per month.

4. A retail pharmacy wants to ensure that sufficient income is being obtained for a new branch that has just opened. The monthly expenses are $6500 for the pharmacist’s salary, total of $1250 for two pharmacy technicians who both work part-time while in school, $25,340 for inventory, $560 for taxes, business expenses of $980, utilities and rent of $11,500, and payment for equipment of $4500 per month.

5. A pharmacy needs to compute the amount of overhead the store has in a year. The salaries are $54,000 per month, rent is $1250 per month, utilities are $22,500 per year, inventory is $86,950 per month, equipment costs $60,000 per year in replacements, supplies are $1250 per month, and miscellaneous expenses are $1550 per month. The depreciation rate is $950 per month.

Markup Of Prescriptions

The markup for a prescription is the same as the gross margin. The actual markup amount is the difference in the purchase cost of the drug and the selling price of the same drug. The formula is as follows:

Markup(or gross margin)=Selling price−Purchase cost

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Markup rates on brand name drugs are generally lower than the markup rate on generics. For instance, if a brand name drug, such as Keflex, costs $100 and has a 6% markup, the cost to the customer is $106 ($100 × 0.06 [6%]). A generic brand for the same drug, cephalexin, may cost $40, and the pharmacy has a 25% markup on generics. The cost will be $50 ($40 × 0.25 [25%]) to the customer. As you can see, pharmacies have a higher profit margin available in generics than they do in brand name drugs. Use of generics allows pharmacies to offer “teaser” prices on these drugs as a way to gain business. This marketing ploy is often used by major chain pharmacies.

Example 15-2

A prescription sells for $35.60, and the cost is $29.90. What is the markup?

Markup=$35.60−$29.90

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Markup=$5.70

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Practice Problems B

Calculate the monetary markups on the following problems:

1. A medication has a selling price of $56 and a cost of $45.

2. A medication has a selling price of $34.50 and a cost of $15.60.

3. A medication has a selling price of $43.50 and a cost of $39.90.

4. A medication has a selling price of $10.20 and a cost of $9.20.

5. A medication has a selling price of $125 and a cost of $93.50.

6. A medication has a selling price of $37 and a cost of $22.25.

7. A medication has a selling price of $47.80 and a cost of $29.35.

8. A medication has a selling price of $77.43 and a cost of $46.90.

9. A medication has a selling price of $7 and a cost of $6.45.

10. A medication has a selling price of $285 and a cost of $219.25.

Percentage of Markup

Markup percentage or the gross margin percentage is calculated by dividing the gross margin by the cost and then multiplying by 100 to figure the percent. Using percentage of markup provides the calculation of which prescription medications have the greatest percentage of profit. The formula is as follows:

Markup percentage=(Gross margin÷Cost)×100

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Example 15-3

A prescription sells for $35.60, and the cost is $29.90. What is the markup percentage?

Markup=$35.60−$29.90

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Markup=$5.70

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Markup percentage=($5.70÷$29.90)×100

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Markup percentage(rounded to hundredths)=19.06%

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Practice Problems C

Calculate the percentage of markup in the following problems. Show your calculations. Round all final answers to tenths.

1. A medication has a selling price of $56 and a cost of $45.

2. A medication has a selling price of $34.50 and a cost of $15.60.

3. A medication has a selling price of $43.50 and a cost of $39.90.

4. A medication has a selling price of $10.20 and a cost of $9.20.

5. A medication has a selling price of $125 and a cost of $93.50.

6. A medication has a selling price of $45 and a cost of $42.

7. A medication has a selling price of $27.90 and a cost of $23.60.

8. A medication has a selling price of $33.75 and a cost of $30.

9. A medication has a selling price of $12.90 and a cost of $9.20.

10. A medication has a selling price of $255 and a cost of $193.50.

Discounts

Discounts or markdowns, may be calculated on prescriptions, over-the-counter (OTC) drugs or other merchandise by subtracting a percentage of the original selling price for the item to lower the price the patient pays; this is also called the markdown price. Discounts and markdowns are used as an incentive to encourage the customer to purchase the item by realizing a savings on the previous total price. Markdowns and discounts may be in the form of manufacturers’ coupons or special discounts for reasons such as senior citizens’ initiatives. Discounts are one of the simplest business-related calculations—a concept used for sale items throughout retail businesses, such as an end-of-season 40% off sale at your local department store. The amount of the discount is always based on the selling price, not on the cost of the item. This mathematical calculation is the opposite of what was accomplished previously when the percentage of markup was accomplished. A discount decreases the sales price based on the previous sales price, while a markup is based on the wholesale price to increase the selling price to cover overhead. The formulas for discounts are as follows:

Discount amount=Selling price×Discount percentageANDDiscounted price=Selling price−Discount amount

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When discounts are given based on manufacturers’ or other coupons, the amount of the coupon should be subtracted from the selling price and the coupon placed in the cash drawer to be used at the end of the day to balance the cash drawer. These coupons are actually a type of refund.

Example 15-4

A medication that sells for $45.50 has a manufacturer’s coupon for 15% off as an incentive to try the medication. What is the cost to the patient following the use of the discount coupon?

Hint: Change percentage to a decimal number for each calculations.

Discount to be given=$45.50×0.15=$6.83

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Discount price=$45.50−$6.83=$38.67

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Practice Problems D

Calculate the discount price in the following problems. Show your work. The discount should always be in the favor of the customer.

1. A patient has a manufacturer’s discount coupon in the amount of 25% for a new prescription medication item. The selling price is $42.50.

2. An ad in the local paper offers 1/3 off a medication that is taken regularly by one of your customers. The patient brings in the coupon for the medicine that costs $33.

3. A drug supplier has a deal that will provide a 25% discount for 10 tubes of a new dermatological preparation. The cost for the 10 tubes is $525.

4. An older patient on a fixed income comes to the pharmacy with a new prescription. The pharmacist knows that the patient will not be able to afford the medication at the selling price as calculated. He tells the patient that he will provide a 12% discount for the medication, which costs $65.

5. An insurance company has a contract with the pharmacy to provide a 5% discount for any prescription for its members. The prescription for John W. has a retail price of $75.50.

6. A retail pharmacy has advertised a 35% off sale on all pain relievers during the first 2 weeks of April, because of the tax-filing deadline. Tylenol’s regular price is $7.59 while at the regular price Motrin IB costs $7.79, and Aleve’s price is $8.29.

7. An ad in the local paper offers 30% off antacid liquid this week with a regular price of $4.54.

8. A manufacturer’s coupon offers a 20% discount on cough syrup. You go to the drug store and find what you need. The retail price is $5.79.

9. A manufacturer supplies a discount of 40% off on the first prescription of a hypolipidemic agent that sells for $75 retail.

10. The pharmacy has bought an over-the-counter medication at a 30% discount of the usual wholesale price. The usual wholesale price is $12.00 for the item.

Gross Profit

The gross profit is the difference in the sales price and the cost of the inventory with no other expenses of the business considered.

The formula for finding gross profit is:

Gross profit(or Loss)=Sales−Cost of inventory

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Tech Note

On financial statements, amounts that signify losses are often placed within parentheses.

Example 15-5

If a pharmacy’s sales were $200,000 and its purchases were $175,000, its gross profit would be $25,000.

Practice Problems E

Calculate the following problems. A month should be calculated as 4 weeks with a week being six working days.

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