1. Calculate the break-even point - 10 points
2. Illustrate the break-even points calculations - 10 points
3. Answer case study questions - 10 points
4. Executive memo/articulation of response and recommendation (citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas) - 20 points

With a blank spreadsheet on her computer screen, Mary began to construct a model that would provide the information needed to help the board make a rational, informed decision. Specifically, Mary wanted to develop answers for the following questions:

1. What is the projected profitability of the urgent care center for the entire year (2020) if volume continues at its current level?
2. How many additional visits per day would be required to break even without the new marketing campaign?
3. How many additional visits per day would be required to break even assuming that the new marketing effort is undertaken?

Case Study

Breakeven Analysis

The Midwest Medical Center, Heartland Community Hospital and Physician Practice Group, once three separate but inter-connected organizations, are currently operating under one name, Midwest Health System (MHS). The organization is located in the Midwest region. MHS is a private, non-profit entity that provides effective and efficient care to patients and supports the academic mission of Midwest University, with which it is affiliated. MHS operates the largest hospital in the region facilitating the clinical operations of private and academic physicians.

Historically, MHS was known in the community for delivering high quality care and superior patient experience. The physicians and clinical staff were not only the best at what they did, but also received praise for providing great customer service. MHS was also known for its services expanding from cancer center, heart and vascular services, transplantation, and general health services to include general surgery, pediatrics, orthopedics, emergency medicine, primary care, and other services that greatly benefited the community.

In addition to providing a wide array of services, MHS adopted unique programs that were offered in a limited capacity by the competitors in the area. The organization was known for employing innovative care models and technologies, such as telehealth, that were expanded to nearby rural communities. Additionally, MHS opened an urgent care clinic and expanded its clinic hours to meet the needs of the patients with less acute health issues, who would otherwise go to the emergency room.

To this day, MHS continues to provide great services to the community; however the organization is not fast enough when responding to market changes. For instance, when the need for urgent care clinics emerged in the local area, the organization responded to this need after a different competitor opened its own clinic. Furthermore, the organization's CEO, Tom Smith, started to become concerned about the urgent care center's overall financial soundness. Smith wonders if MHS should continue to operate its center or close it down. The center is currently handling a patient load of 45 visits per day, but it has the physical capacity to handle up to 85 visits a day. Smith's decision is further complicated by the fact that Sarah Johnson, MHS' marketing director, wants to embark on a new marketing program for the clinic. She believes that an expanded marketing effort aimed at local businesses would bring the number of net new patients needed to the clinic a financial winner.

Smith asked Mary Davis, MHS chief financial officer, to look into the whole matter of the urgent care center. In their meeting, Smith shared that he visualizes three potential outcomes for the center: (1) it could be closed,(2) it could continue to operate as is, or (3) it could continue to operate accompanied by the expanded marketing campaign.

As a starting point for the analysis, Davis collected the most recent financial and operating data for the center, which are summarized in the case study Exhibit 1.1. Next, Davis met with the center's operational director several times. The primary purpose of the meetings was to estimate the additional costs that would emerge if the center volume increased above the current level of 45. Any incremental usage would require additional expenditures for administrative and medical supplies, estimated to be $5.00 per patient visit for medical supplies (tongue blades, rubber gloves, etc.), and $2.00 per patient visit for administrative supplies (file folders, clinical record sheets, etc.).

Because of the relatively low volume level, the urgent care center has purposely been staffed at the bare minimum. In fact, some center employees have started to grumble about not being able to do their jobs properly because of overwork. Thus, any increase in the number of patient visits would require immediate administrative and medical staffing increases. Furthermore, as the number of visits increase, the center would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 1.2.

Finally, Mary met with Sarah to learn more about the proposed marketing program. Sarah believes that a strong marketing effort could bring additional patients to the center. The proposed marketing effort requires a marketing assistant plus advertising costs for newspaper, radio, and TV ads as well as for brochures and handouts. The incremental costs associated with the marketing campaign are summarized in Exhibit 1.2.

With a blank spreadsheet on her computer screen, Mary began to construct a model that would provide the information needed to help the board make a rational, informed decision. Specifically, Mary wanted to develop answers for the following questions:

1. What is the projected profitability of the urgent care center for the entire year (2020) if volume continues at its current level?
2. How many additional visits per day would be required to break even without the new marketing campaign?
3. How many additional visits per day would be required to break even assuming that the new marketing effort is undertaken?

Exhibit 1.1

Monthly Averages

2019

Jan 2020

Feb 2020

2019

Jan/Feb 2020

Total

Number of visits

14,522

1,365

1,335

1,210

1,350

1,230

Net revenue

548,747

55,028

54,748

45,729

54,888

47,037

Average charge per visit

38

40

41

38

41

38

Operating expenses

Salaries and wages

154,250

13,540

13,544

12,854

13,542

12,952

Physician fees

192,000

18,000

18,000

16,000

18,000

16,286

Malpractice insurance

31,440

3,215

3,215

2,620

3,215

2,705

Travel and education

5,365

538

665

447

602

469

General insurance

8,112

843

843

676

843

700

Subscriptions

189

0

0

16

0

14

Electricity

11,820

1,124

1,029

985

1,077

998

Water

1,260

135

142

105

139

110

Equipment rental

1,260

105

105

105

105

105

Building lease

155,745

12,500

12,500

12,979

12,500

12,910

Other operating expenses

103,779

8,152

7,923

8,648

8,038

8,561

Total operating expenses

665,220

58,152

57,966

55,435

58,061

55,810

Net profit (loss)

-116,473

-3,124

-3,218

-9,706

-3,173

-8,773

Gross margin (%)

-21.23%

-5.68%

-5.88%

-21.23%

-5.78%

-18.65%

Exhibit 1.2