The Break Even Analysis Concept in Business Essay

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Breakeven Analysis

Breakeven analysis is a procedure used by business owners, auditors, accountants, and management staff. It depends on sorting and classifying costs that change when the production yield varies and costs not straightforwardly identified with the volume of generation production (Choudhary, Patnaik, Singh, & Kaushal, 2013). By implication, accountants can classify the firm’s cost of operations based on fixed costs and variable costs.

Thus, total variable costs and fixed costs are equated with the services revenue to ascertain the level of sales at which the hospital makes a profit or loss. This technique is called the breakeven analysis. The contribution margin is a cost bookkeeping technique that gives the organization a chance to decide the benefit of its assets and services (Bai et al., 2017). The expression “contribution margin” refers to a unit measurement of the hospital’s service operating margin. It is computed as the service value minus its aggregate variable expenses per unit. This metric enables an organization to assess distinctive zones of the business to decide the productivity of each service.

This technique is also used to decide when the investment will have the capacity to fund the majority of its costs and make a profit. With a goal to become active and streamline the utilization of assets with decreasing repayments, healthcare facilities are always probing for profitable endeavors (Finkler, Jones, & Kovner, 2013). Accountants utilized this analysis to ascertain if an underlying business will be an effective utilization of capital and a productive resource.

After a broad market examination, the associates discovered there is a unique requirement for a fertility facility in the territory. The start-up costs for the fertility and treatment facility was set at $9,788,000, which incorporates the contracting of doctors, anesthesiologists, medical caretakers, staff attendants, compensations, wages, payment for high-innovation hardware, and miscellaneous expenditures.

Based on the above assumption, different operating variables will be computed.

The breakeven point of the hospital sales = Fixed cost of operation / Service price per unit – Variable cost of operations.

Consequently, the breakeven point = Fixed cost of operations / Contribution margin per unit.

Mathematically, breakeven point per unit X = Fixed cost / (Price – Variable cost).

Where:

  • X = Breakeven point
  • F = Fixed costs
  • P = Price
  • V = Variable cost per patient
  • Therefore, X = F / (P-V).

The patient acuity of the facility is clarified under simple, moderate and complex. Based on this classification, the number of visits is charged and the percentages recorded.

The descriptive demographics are computed below.

Patient AcuityPercentage of Patient VisitsCost of Service
per Patient
Simple15%$2,000
Moderate60%$6,500
Complex25%$10,000

The contribution margin is a cost bookkeeping technique that gives the organization a chance to decide the benefit of its assets and services. The expression “contribution margin” refers to a unit measurement of the hospital’s service operating margin. It is computed as the service value minus its aggregate variable expenses per unit. This metric enables an organization to assess distinctive zones of the business to decide the productivity of each service.

Therefore, contribution margin = Services revenue – Variable expenditures.

Please note, the hospital’s variable costs per patient = $500.

The contribution margin can be calculated using the variable cost and the cost of service per patient.

Thus, simple service = 2000 – 500 = 1500.

The contribution margin for Simple patient acuity = $1,500.

Moderate service = 6,500- 500 = 6,000

The contribution margin for Moderate patient acuity = $6,000.

Complex service = 10,000 – 500 = 9,500

The contribution margin for Complex patient acuity = $9,500.

The descriptive result of the contribution margin is presented below.

Patient AcuityCost of Service
per Patient
Variable ExpenseContribution Margin
Simple$2,000$500$1,500
Moderate$6,500$500$6,000
Complex$10,000$500$9,500

The weighted average contribution margin can be used to calculate the cost per visit. The weighted average contribution margin = Percentage patients visit x contribution margin. Thus, the patient acuity service will be used to determine the weighted average contribution margin.

Simple service = 15% x 1500 = $225

Moderate service = 60% x 6000 = $3600

Complex service = 25% x 9500 = $2375

The descriptive result of the weighted contribution margin is presented below.

Patient AcuityPercentage of Patient VisitsContribution Margin (CM)Weighted Average Contribution Margin
Simple15%X $1,500=$225
Moderate60%X $6,000=$3,600
Complex25%X $9,500=$2,375

Based on the result, the total weighted average contribution margin = Sum of each weighted average contribution margin.

Total weighted average contribution margin = 225 + 3600 + 2375 = $6,200

Thus, the breakeven analysis is computed using the number of visits.

Therefore, number of patient visits to the fertility clinic = Fixed cost / Total weighted average contribution margin.

Mathematically, Q = F/TWACM

Where Q = Number of patient visits

F = Fixed cost of visits per year

TWACM = Total weighted average contribution margin

Fixed cost = $9,788,000

Total weighted average contribution margin = $6,200.

Q = 9788000/6200

Number of patients visit to breakeven = 1579.

This figure can be used to compute the breakeven value for each patient acuity.

Simple patient acuity = 1579 x 15% = 237

Moderate patient acuity = 1579 x 60% = 947

Complex patient acuity = 1579 x 25% = 395

Patient AcuityPercentage of Patient VisitsPatients by AcuityPatient Type to Breakeven
Simple15%1,579 x 15%237
Moderate60%1,579 x 60%947
Complex25%1,579 x 25%395

From the case study, the management of the fertility clinic expects 7488 visits per year.

Working days = 312 days

The planned visits and the number of working operating days can be used to calculate the number of patient visits per day.

Patients visits per day = 7488/312 = 24

Thus, 24 patients are treated daily.

The number of patient visits per year = 1579

Therefore, the breakeven per day = 1579/24 = 66 days.

Interpretation of the Breakeven Analysis

To propel the hospital’s mission and objectives the fertility facility can breakeven in the first year of business with extra income in the preceding fiscal year. While the clinic’s patient acuity can be anticipated, volume levels can be realized and expanded through advertising and a robust referral framework that would balance any budgetary risk. Given these situations, it is suggested that this fertility clinic continues with the plans to execute an outpatient facility in this service territory.

Given the above business proposition, the fertility facility will take 66 days to break even, leaving 246 extra days to generate profit for future undertakings. Based on this analysis, the business is viable and profitable. If the hospital operates for 66 days, they will make the costs of operation. By implication, the remaining number of days would be used to accumulate profit.

References

Bai, Y., Gu, C., Chen, Q., Xiao, J., Liu, D., & Tang, S. (2017). The challenges that head nurses confront on financial management today: A qualitative study. International Journal of Nursing Sciences, 4(1), 122-127. Web.

Choudhary, P., Patnaik, S., Singh, M., & Kaushal, G. (2013). Break-even analysis in healthcare setup. International Journal of Research Foundation of Hospital and Health Care Administration, 1(1), 29-32. Web.

Finkler, S. A., Jones, C., & Kovner, C. (2013). Financial management for nurse managers and executives. (4th ed.) St. Louis: Elsevier.

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