NR 630 Santamaria V Break-Even Analysis Week 6

Running head: BREAKEVEN ANALYSIS Breakeven Analysis: Week 6 Assignment Instractor Institution NR630: Executive Practicum Date Breakeven Analysis: Week 6 Assignment A breakeven analysis is used to determine at what point your business will be able to cover all of its expenses and begin to make a profit (U.S. Small Business Administration, n.d.). In an effort to become more efficient and optimize the use of resources with dwindling reimbursements, heath care organizations are constantly searching for profitable ventures (Finkler, Kovner, & Jones, 2013). Breakeven analyses are crucial to determining whether an initial investment will be an effective use of capital and a fruitful asset. One such venture is to establish an outpatient fertility clinic. After an extensive market analysis, my colleagues and I have determined that there is a significant need for such a clinic in our service area. The start-up costs (fixed cost) for the fertility clinic equate to $9,788,000 which includes the hiring of specialty physicians, anesthesiologists, advanced practice nurses and staff nurses, salaries purchase of high-technology fertility equipment, and other miscellaneous items (Chamberlain College of Nursing, 2017). The following break-even analysis is based on the above business proposal with calculation formulas based on the week 6 lesson from Chamberlain College of Nursing (2017). To determine a breakeven point the following formula is used: Breakeven Point (Q)=Fixed Costs (FC)/[Price (P)-Variable Costs per patient (VC)] or Q= FC P-VC Sample demographics and patient breakdown: Patient Acuity Percentage of Patient Visits Cost of Service per Patient Simple 15% $2,000 Moderate 60% $6,500 Complex 25% $10,000 An important concept in the break-even analysis is contribution margin. The contribution margin is used to determine how much each patient will contribute to the fixed expenses after the variable expenses are covered (Averkamp, 2017). Contribution Margin= Revenues-Variable Expenses Variable Expense = $500 Patient Acuity Cost of Service per Patient Variable Expense Contribution Margin (CM) Simple $2,000 - $500 = $1,500 Moderate $6,500 - $500 =$6,000 Complex $10,000 - $500 =$9,500 (Finkler, Kovner, & Jones, 2013) Different patient types, as seen in this scenario, have different costs per service, which will contribute varying amounts to the total fixed costs. These differences are known as the weighted average contribution margins (Chamberlain College of Nursing, 2017). The weighted average contribution margin represents an average of how much revenue each visit will contribute to the fixed costs and is used to determine the break- even quantity (Q). The following table represents the weighted contribution margin based on the percentage of patient types then combined to yield a total weighted average contribution margin. Patient Acuity Percentage of Patient Visits Contribution Margin (CM) Weighted Average Contribution Margin Simple 15% X $1,500 =$225 Moderate 60% X $6,000 =$3,600 Complex 25% X $9,500 =$2,375 Total Weighted Average Contribution Margin : $6,200 The next step in the breakeven analysis is to determine the quantity of patients needed in order to breakeven. The following formula is used: Q=FC/ Total Weighted Average CM In this proposal, the fixed costs total $9,788,000. Q=$9,788,000/$6,200 Q=1,579 visits to breakeven Based on the predicted percentage of each patient visit by acuity, the following table represents the total number of each patient type needed to breakeven. Patient Acuity Percentage of Patient Visits # of Patients by Acuity Total # of Patient Type to Breakeven Simple 15% 1,579 x 15%= 237 Moderate 60% 1,579 x 60%= 947 Complex 25% 1,579 x 25%= 395 To further dissect the breakeven point, the total patients seen per day will determine at which point the clinic can expect to breakeven. Patients seen per day=Total Anticipated patients/ Days per year Based on this scenario the total anticipated patients are 7,488 with a clinic schedule of Monday through Saturday, equaling 312 days per year. 24 patients per day=7,488/312 Once the total patients per day is derived, the days to breakeven can be calculated. Days to breakeven = # of patients to breakeven/ # of patients served each day 66 days to breakeven=1579/24 Based on the above business proposal, the creation of the fertility clinic will only take 66 days to breakeven, leaving 246 additional days to turn a profit and provide additional capital for future endeavors. In consideration of a moderately conservative patient acuity scenario, given the same anticipated total visits, the breakeven analysis still projects a substantial profit. Patient Acuity Conservative Percentage of Patient Visits Contribution Margin (CM) Weighted Average Contribution Margin Simple 60% X $1,500 =$900 Moderate 25% X $6,000 =$1,500 Complex 15% X $9,500 =$1,425 Total Weighted Average Contribution Margin : $3,825 Q=$9,788,000/$3,825 Q=2559 visits to breakeven 24 patients per day=7,488/312 107 days to breakeven=2559/24 312-107=207 profitable patient days Patient Acuity Percentage of Patient Visits # of Patients by Acuity Total # of Patient Type to Breakeven Simple 15% 2559x 60%= 1535 Moderate 60% 2559x 25%= 640 Complex 25% 2559x 15%= 384 Despite our extensive market analysis, our volume predictions may be retarded during first-year growth phase. To mitigate any financial risks, the following scenario is based on one-half the anticipated visits keeping the acuity representation the same. Q=$9,788,000/$6,200 Q=1,579 visits to breakeven 12 patients per day=3744/312 132 days to breakeven=1579/=180 profitable patient days Both of the moderately conservative prediction models only serve to demonstrate the substantial benefits the opening of this clinic will provide to both patients (as demonstrated in our market analysis) and investors. In order to advance our organizational mission and goals, the investment in the proposed fertility clinic can be expected to be breakeven within the first year with additional profitability over many years to invest in future. In order to fully actualized any financial losses, both a decreased in patient acuity and volume must be incorporated. Patient Acuity Conservative Percentage of Patient Visits Contribution Margin (CM) Weighted Average Contribution Margin Simple 60% X $1,500 =$900 Moderate 25% X $6,000 =$1,500 Complex 15% X $9,500 =$1,425 Total Weighted Average Contribution Margin : $3,825 Q=$9,788,000/$3,825 Q=2559 visits to breakeven (1/2 anticipated volume) 8 patients per day=2,559/312 320 days to breakeven=2559/312 -8 profitable patient days While patient acuity can only be predicted, volume levels can be actualized and increased through marketing and a strong referral system that would offset any financial risk to the organization. Given all of these scenarios, it is recommended that this organization proceed with the plans to implement an outpatient fertility clinic in this service area. References Averkamp, H. (2017). Achieving a desired profit and break-even point in dollars. Retrieved from Chamberlain College of Nursing (2017). NR-630 Week 6: Cost-Benefit Analysis and Break-Even Analysis [Online lesson]. Downers Grove, IL: DeVry Education Group Finkler, S. A., Jones, C. B., & Kovner, C. T. (2013). Cost management. In Financial management for nurse managers and executives (4th ed., pp. 132-150). U.S. Small Business Administration. (n.d.). Breakeven analysis. Retrieved from