Question

The Feasibility of the BHC-Downtown: an Application of Break-even Analysis (performed BEFORE
the Clinic was opened)

Objective: to explore the financial implications of the Pre-opening marketing/operational strategy for the DHC.

Based on Preliminary 12-month Expense Budget

a) Estimated annual Fixed Cost (building, insurance, administration, etc.) =$

b) Maximum annual number of patient visits = XXXX (i.e. capacity )Given that the hourly patient capacity is 6 per hour for 8 hours per day and 250 operating days per year.

c) Average price = $125 (Price represents a weighted average including both insurance reimbursement and copays)

d) Given that personnel costs average $250.00 per hour (this is incurred

every hour the Clinic is open).

e) Expected “capacity utilization rate” = 85%

A. What are the break-even Fixed Costs given the above?

B. What are the break-even Fixed Costs if the center is to achieve a 10% contribution margin?(4 points)

Answer 1

Patient Capacity =6*8*250=12000

Expected Utilization Rate=85%

Expected number of patients =85%*12000=10,200

Expected Revenue =$125*10200=$1,275,000

Variable Cost =$250 per hour

Number of patients per hour =6

Variable Cost =$250/6=$41.67 per patient

Total annual variable cost 250*85%*8*250=$425,000

A. BREAKEVEN FIXED COST:

Assume Fixed Cost=F

For Breakeven:

F+425000=Annual Sales Revenue=1275000

F=1275000-425000=$850,000

B.10% Contribution margin:

Sales Revenue =1275000

Contribution margin =10%*1275000=$127,500

Variable Costs =1275000-1275000=$1,147,500

BREAKEVEN FIXED COSTS=1275000-1147500=$127,500