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NR630 Executive Practicum

Break-even Analysis Case Study

You and several of your colleagues 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.

The outpatient fertility clinic will have a fixed cost of $9,788,000 —start-up costs, hiring of specialty physicians, anesthesiologists, advanced practice nurses and staff nurses, salaries, purchase of high-technology fertility equipment, and other miscellaneous items.

The fertility clinic will be open Monday through Saturday; 312 days per year.

The fertility outpatient clinic has variable costs of $500 per patient visit —fertility medical equipment, oxygen supplies, and other miscellaneous items.

Each patient will be charged the following per visit based on patient acuity categories:

  1. Simple 15% = $2,000
  2. Moderate 60% = $6,500
  3. Complex 25% = $10,000

The projected patient visits per year are anticipated to be 7,488 visits. How many patients would the clinic have to provide services for to break even, and at what point would this occur?

What is your interpretation of the break-even analysis? Is this project a viable and profitable service? Does the break-even analysis support moving forward with this business? Why, or why not?

As describe in week six Executive Practicum lecture of Finkler, Kovner and Jones (2010), a quantity that is lower than Q, is considered a loss; a quantity higher than Q, would be a profit. P is the average dollar amount of revenue the Outpatient Fertility Clinic will receive per patient. The formula is the relationship between revenues and expenses. If total revenue is greater than expenses, there is a profit. If total revenue is less than the expenses, there will be a loss. If the revenue is equal to expenses, it is not a profit or a loss, it is said that an organization will break-even.

The formula consist of the following:

  1. Q - the break-even quantity or the number of patients needed to break-even
  2. FC - the total fixed cost (rent, insurance lease cot)
  3. P - the average amount collected per patient
  4. VC - the variable cost per patient (labor, material, supplies, utilities)

Example: Q = FC = $9,788,000 = $ = 7488 Patient Visits
P – VC $ - $500

Each patient will be charged the following per visit based on patient acuity categories:

Percentage Contribution Weighted Average
of Visits Margin Contribution Margin

Simple 15% = $13,333 = $2,000

Moderate 60% = $10,833 = $6,500

Complex 25% = $40,000 = $10,000


Total Weighted Average Contribution Margin: $21,389

The $21,389 weighted average represents the average contribution margin for all types of patient charges per visits based on acuity. It can be used to calculate the breakeven quantity. Assume that fixed costs are at $9,788,000

$9,788,000
Q = $21,389 = 458 visits

When there are three different types of acuity levels for patient visits to find the breakeven volume. Of the total 458 visits, 69 would be expected to be simple (15%), 763 moderate (60%), and 115 visits as simple (25%).

Each patient will be charged the following per visit based on patient acuity categories:

Percentage Contribution Weighted Average Average
of Visits Margin Contribution Margin Cost

Simple 15% = $13,333 = $2,000 = $7,667

Moderate 60% = $10,833 = $6,500 = $10,833

Complex 25% = $40,000 = $10,000 = $40,000

Percentage Number Average

of Visits of Visits Billed Charges

Simple 15% = 69 = $529,000

Moderate 60% = 763 = $8,265,833

Complex 25% = 115 = $4,600,000

Total = $13, 394,833



The formula to determine the exact day when a profit for the Outpatient Fertility Clinic will begin. Using the same example, days to breakeven is calculated as follows:

Days to breakeven = # of visits to breakeven
# of visits the clinic serves per day

Patients Visits Margin Contribution
Margin

Simple 1123 15% x $13,333 = $2,000

Moderate 4493 60% x $10,833 = $6,500

Complex 1872 25% x $40,000 = $10,000

7488

$9,788,000
Q = $21,389 = 458 visits and patients seen

# of patients served per day = # of patient’s seen per year
# of days per year

= 7488 = 24 patient per day
312

Days to breakeven = # of patients to break-even
# of patients the Outpatient Fertility Clinic per day

= 458 = 19
24

The Outpatient Fertility Clinic will breakeven on the 19th day of operation and, on the 20th day of operation of the Outpatient Fertility Clinic, will start to make a profit.

References

Finkler, S. A., Kovner, C.T., & Jones, C. (2010). Financial management for nurse managers and

executives. (3rd. Ed.). Philadelphia, PA: Saunders Publishing. Retrieved from http://nursingonline.chamberlain.edu/re/lecture week 6

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