Break-Even Analysis Case Study
You and several of your colleague business partners have decided to establish an outpatient fertility clinic in your service area. All of you are very familiar with this patient population
...
Break-Even Analysis Case Study
You and several of your colleague business partners have decided to establish an outpatient fertility clinic in your service area. All of you are very familiar with this patient population base, have completed an extensive market analysis that demonstrated a great need for the service, and are comfortable with setting up a business and the costs associated with this special group of patients.
As part of the business plan, you and your partners will need to convince stakeholders that this new service endeavor will be viable. They will want to know how many patients visits annually will need to occur and how long it will take for the service to be at least cost neutral or profitable. To provide them with this information you will perform a break-even analysis. Use the following data, conduct the analysis accounting for the contribution margin of each patient acuity category.
• Fixed Costs: $9,788,000 (start-costs, specialty physicians, anesthesiologists, APNs, staff nurses and other staff salaries, specialty equipment, other miscellaneous)
• Variable costs: $500/patient visit (specialty equipment, oxygen supplies, other miscellaneous)
• Clinic days: Monday-Saturday- 305 days/year
• Projected patient visits per year: 7480
• Patient charges by patient acuity category:
o Simple (20%) $2000/visit
o Moderate (70%) $6500/visit
o Complex (10%) $10,000/visit
Break-even Analysis Data Table
Acuity Category Percentag e % Charge per Visit Visits per Year Charges per Year Visits per Day Charges per Day Contribution Margin
Simple 20% $2000 1496 (7480x0.20
) $2,992,000 (1496x2000
) 5 (1496/305
) $10,000 (5x2000) $1500 ($300)
Moderat e 70% $6500 5236 (7480x0.70
) $34,034,00 0 (5236x6500
) 17 (5236/305
) $110,500 (17x6500) $6000 ($4200)
Complex 10% $10,000 748 (7480x0.10
) $7,480,000 (748x10000
) 2 (748/305) $20,000 (2x10000) $9500 ($950)
Expected Total Daily Charges 140,500
Expected Total Daily Revenue 128,500
Break Even point in days 72 days
Break Even point in visits 1796
visits
1. Describe your approach to this case study. In addition to the numbers given, what do you need to know before you can calculate the break-even analysis?
The weighted average contribution margin needs to be known in order to find the breakeven point. To find the weighted CM, the following steps need to be taken:
CM=Revenues-Variable Expenses. Once that number is found for each acuity category, the percentage is multiplied by the CM to get the weighted average contribution margin. This number is found in the parentheses in the table. Once you have the weighted contribution margin, the following formula is used to find the total number of visits required to break even: Fixed Costs/Total Weighted Average CM (Finkler, Jones and Kovner, 2013).
2. How many patient visits are expected per day? 7480/305= 25 projected patients per day
3. What is the contribution margin of each category of patient?
The weighted contribution margin is found using: Percentage of Patient Visits x (Charge per Visit- Variable Costs). The numbers are found in parentheses in the table above (Finkler, Jones and Kovner, 2013).
4. Based on the data and your calculations, what is the expected daily revenue?
Expected daily revenue factors in the variable costs per patient and subtracts it from the overall charges. In this scenario, the visits per day is multiplied by the contribution margin instead of the charge per visit. For each acuity group, it is:
Simple: $7,500 Moderate: $102,000 Complex: $19,000
These are then added together to find the expected daily revenue of $128,500 (Finkler, Jones and Kovner, 2013).
5. How long (in days, months, or years) will it be before the return on investment begins?
To calculate this, you need to know the number of visits to breakeven, and the number of patients per day. To calculate the number of visits to breakeven: Fixed Costs/Total Weighted Average Contribution Margin. By adding up the weighted contribution margins from all acuity categories, you get a total of
$5450.
$9,788,000/$5450=1796 patient visits to breakeven.
To find the number of days to breakeven: # of visits to breakeven/# patients served per day. In this scenario:
1796/25=72 days to break even (Finkler, Jones and Kovner, 2013).
6. How many patient visits will be required to reach the break-even point?
This is calculated by Fixed Costs/Total Weighted Average Contribution Margin, as stated in the question above.
$9,788,000/$5450=1796 patient visits to break even (Finkler, Jones and Kovner, 2013).
7. Discuss your analysis. Is the project viable and profitable service? Does the analysis support moving forward with the business? Cite specific data from you analysis to support your interpretation. Assuming that anticipated patient load is accurate, this is absolutely a viable and profitable service. With them breaking even at 72 days, that means that the remaining 233 days will bring them profit. Assuming my calculations are correct, if you multiply 233 times the expected daily revenue of
$128,500, that is a profit of $29,940,500 in a year. I would say that is pretty profitable and I would move forward with the business.
References
Finkler, S., Jones, C. & Kovner, C. (2013). Cost management. In Financial Management for Nurse Managers and Executives, (4), 132-150.
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