You and several of your colleagues business partners have decided to establish an outpatient fertility clinic in your service area. All of you are very familiar with this patient population base, have completed an extensive market analysis that demonstrated a great need for the service, and are comfortable with setting up a business and the costs associated with this special group of patients. The outpatient fertility clinic will have a fixed cost of $9,788,000 start up costs, hiring of specialty physicians, anesthesiologists, advanced practice nurses and staff nurses, salaries, purchase of high technology fertility equipment, and other miscellaneous items. The fertility clinic will be open Monday through Saturday; 312 days per year. The fertility outpatient clinic has variable costs of $500 per patient visit-fertility medical equipment, oxygen supplies, and other miscellaneous items. Each patient will be charged the following per visit based on patient acuity categories: 1. Simple 15% = $2,000 2. Moderate 60% = $6,500 3. Complex 25% = $10,000 The projected patient visites per year are anticipated to be 7,488 visites. many patients would the clinic have to provide ser services for to break even, and at what point would this occur? What is your interpretation of the break even analysis? Is this project a variable and profitable service? Does the break even analysis support moving forward with this business? Why, or why not?

Question

You and several of your colleagues business partners have decided to establish an outpatient fertility clinic in your service area. All of you are very familiar with this patient population base, have completed an extensive market analysis that demonstrated a great need for the service, and are comfortable with setting up a business and the costs associated with this special group of patients. The outpatient fertility clinic will have a fixed cost of $9,788,000 start up costs, hiring of specialty physicians, anesthesiologists, advanced practice nurses and staff nurses, salaries, purchase of high technology fertility equipment, and other miscellaneous items. The fertility clinic will be open Monday through Saturday; 312 days per year. The fertility outpatient clinic has variable costs of $500 per patient visit-fertility medical equipment, oxygen supplies, and other miscellaneous items. Each patient will be charged the following per visit based on patient acuity categories: 1. Simple 15% = $2,000 2. Moderate 60% = $6,500 3. Complex 25% = $10,000 The projected patient visites per year are anticipated to be 7,488 visites. many patients would the clinic have to provide ser services for to break even, and at what point would this occur? What is your interpretation of the break even analysis? Is this project a variable and profitable service? Does the break even analysis support moving forward with this business? Why, or why not?

Answer 1

To calculate the number of patients required for the fertility clinic to break even, we need to consider the fixed costs and the variable costs associated with each patient visit.

First, let's calculate the total variable costs:
Variable cost per patient visit = $500
Projected patient visits per year = 7,488 visits
Total variable costs = Variable cost per patient visit x Projected patient visits per year
= $500 x 7,488
= $3,744,000

Next, let's calculate the contribution margin for each patient acuity category:
Contribution margin for Simple visit = Revenue per visit - Variable cost per visit
= $2,000 - $500
= $1,500

Contribution margin for Moderate visit = Revenue per visit - Variable cost per visit
= $6,500 - $500
= $6,000

Contribution margin for Complex visit = Revenue per visit - Variable cost per visit
= $10,000 - $500
= $9,500

Now, let's calculate the weighted average contribution margin:
Weighted average contribution margin = (Contribution margin for Simple visit x % of Simple visits) +
(Contribution margin for Moderate visit x % of Moderate visits) +
(Contribution margin for Complex visit x % of Complex visits)
= ($1,500 x 0.15) + ($6,000 x 0.6) + ($9,500 x 0.25)
= $225 + $3,600 + $2,375
= $6,200

Using the contribution margin, we can now calculate the break-even point:
Break-even point (in dollars) = Fixed costs / Weighted average contribution margin
= $9,788,000 / $6,200
= 1,576 patients

Therefore, the clinic would need to provide services to 1,576 patients to break even.

Now, let's interpret the break-even analysis and evaluate the profitability of this project. The break-even analysis helps determine the minimum number of patients needed to cover all costs and reach the point where the clinic is neither making a profit nor incurring a loss. In this case, the break-even point is 1,576 patients.

To assess profitability, we need to analyze whether the number of patients projected to be serviced is higher or lower than the break-even point.

If the projected number of patients is higher than the break-even point, it means the clinic would be serving more patients than required to cover all costs, indicating a potentially profitable service. However, if the projected number of patients is lower than the break-even point, it suggests that the clinic may not be able to cover all costs, indicating a potential loss.

In this scenario, the projected patient visits per year are 7,488 visits, which is significantly higher than the break-even point of 1,576 patients. This suggests that the clinic is expected to generate a profit as it will be serving a larger number of patients than required to cover all costs.

Based on the analysis, the break-even analysis supports moving forward with this business as it demonstrates the potential for profitability. However, further analysis is needed to consider factors such as market demand, competition, and potential revenue growth to make a fully informed decision.

Answer 2

To calculate the break-even point for the outpatient fertility clinic, we need to determine the total fixed costs and the contribution margin per patient visit.

The fixed costs for the clinic are $9,788,000, and the variable cost per patient visit is $500. We also have the revenue generated per patient visit based on acuity categories:

- Simple: 15% of patients at $2,000 per visit
- Moderate: 60% of patients at $6,500 per visit
- Complex: 25% of patients at $10,000 per visit

Let's calculate the contribution margin per patient visit for each acuity category based on the revenue and variable cost:

- Simple: $2,000 - $500 = $1,500 contribution margin
- Moderate: $6,500 - $500 = $6,000 contribution margin
- Complex: $10,000 - $500 = $9,500 contribution margin

Now, let's determine the proportion of each acuity category based on the projected patient visits per year:

- Simple: 15% of 7,488 visits = 1,123 patients
- Moderate: 60% of 7,488 visits = 4,493 patients
- Complex: 25% of 7,488 visits = 1,872 patients

Next, we can calculate the contribution margin per patient category:

- Simple: 1,123 patients * $1,500 = $1,684,500
- Moderate: 4,493 patients * $6,000 = $26,958,000
- Complex: 1,872 patients * $9,500 = $17,808,000

To find the total contribution margin, we sum the contribution margins for each category:

Total contribution margin = $1,684,500 + $26,958,000 + $17,808,000 = $46,450,500

To determine the number of patients needed to break even, we divide the total fixed costs by the contribution margin per patient:

Break-even patients = $9,788,000 / $46,450,500 ≈ 210.64

Therefore, the clinic would need to provide services for approximately 211 patients to break even.

Interpretation of the break-even analysis:
The break-even analysis shows the number of patients the clinic needs to provide services for to cover all costs and neither make a profit nor incur a loss. In this case, the clinic would need around 211 patients to cover its fixed and variable costs.

Profitability of the service:
Since the break-even analysis assumes no profit or loss, it doesn't directly indicate whether the project is profitable. To determine profitability, you would need to compare the revenue generated from patient visits to the total costs, including variable and fixed costs.

Decision to move forward:
Based solely on the break-even analysis, it appears that the outpatient fertility clinic has the potential to be a profitable service. However, other factors such as market demand, competition, and potential revenue growth should also be considered before making a final decision to move forward with the business.