Calculate the break-even point - 10 points Illustrate the break-even points calculations - 10 points Answer case
Question:
- Calculate the break-even point - 10 points
- Illustrate the break-even points calculations - 10 points
- Answer case study questions - 10 points
- 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:
- What is the projected profitability of the urgent care center for the entire year (2020) if volume continues at its current level?
- How many additional visits per day would be required to break even without the new marketing campaign?
- 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:
- What is the projected profitability of the urgent care center for the entire year (2020) if volume continues at its current level?
- How many additional visits per day would be required to break even without the new marketing campaign?
- 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