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?
To determine the break-even point and assess the profitability of the outpatient fertility clinic, we need to analyze the fixed and variable costs, as well as the revenue generated from patient visits.
1. Fixed Costs:
The fixed costs include start-up costs, salaries, equipment purchases, and miscellaneous items. These costs are constant and do not change with the number of patient visits. In this case, the fixed costs are $9,788,000.
2. Variable Costs:
The variable costs include medical equipment, oxygen supplies, and other miscellaneous items associated with each patient visit. These costs vary depending on the number of patient visits. The variable cost per patient visit is $500.
3. Revenue from Patient Visits:
To calculate the revenue from patient visits, we multiply the number of patient visits by the charges per visit based on patient acuity categories:
- Simple (15%): 15% of 7,488 patient visits x $2,000 charge per visit
- Moderate (60%): 60% of 7,488 patient visits x $6,500 charge per visit
- Complex (25%): 25% of 7,488 patient visits x $10,000 charge per visit
4. Break-Even Analysis:
The break-even point is the number of patient visits needed to cover all the fixed and variable costs. To calculate this, we use the following formula:
Break-even point (in patient visits) = Fixed Costs / (Revenue per patient visit - Variable Costs per visit)
Substituting the given values:
Break-even point = $9,788,000 / (($2,000 x 0.15) + ($6,500 x 0.6) + ($10,000 x 0.25) - $500)
After calculating, the break-even point is approximately 6,901 patient visits.
5. Interpretation of Break-Even Analysis:
The break-even analysis helps determine the minimum number of patient visits required for the outpatient fertility clinic to cover all costs. In this case, the clinic needs at least 6,901 patient visits to break even.
6. Profitability Assessment:
To assess profitability, we need to compare the projected patient visits per year (7,488) with the break-even point (6,901). If the projected patient visits exceed the break-even point, the business is expected to be profitable. In this case, the projected patient visits exceed the break-even point, indicating that the clinic could potentially be a profitable venture.
7. Decision to Move Forward:
Based on the break-even analysis, if the projected patient visits exceed the break-even point, it supports moving forward with the business. However, other factors such as market demand, competition, and potential revenue growth should also be considered before making a final decision.
Note: This analysis assumes that the projected patient visits, charges per visit, and patient acuity categories are accurate and do not change over time. Any changes in these factors will affect the break-even point and overall profitability.
To determine the break-even point for the outpatient fertility clinic, we need to calculate the total cost and the contribution margin per patient visit.
1. Start by calculating the total fixed costs:
Fixed Costs = $9,788,000
2. Next, calculate the variable cost per patient visit:
Variable Costs = $500
3. Calculate the total contribution margin per patient visit:
Contribution Margin = Patient Visit Charges - Variable Costs
For the three patient acuity categories:
Contribution Margin for Simple = $2,000 - $500 = $1,500
Contribution Margin for Moderate = $6,500 - $500 = $6,000
Contribution Margin for Complex = $10,000 - $500 = $9,500
4. Determine the weighted average contribution margin based on the anticipated patient visit proportions:
Weighted Average Contribution Margin = (Contribution Margin for Simple * Proportion of Simple Patients) + (Contribution Margin for Moderate * Proportion of Moderate Patients) + (Contribution Margin for Complex * Proportion of Complex Patients)
Given the patient visit proportions:
Proportion of Simple Patients = 15%
Proportion of Moderate Patients = 60%
Proportion of Complex Patients = 25%
Weighted Average Contribution Margin = ($1,500 * 0.15) + ($6,000 * 0.6) + ($9,500 * 0.25)
5. Calculate the number of patient visits needed to break even:
Break-Even Patient Visits = Total Fixed Costs / Weighted Average Contribution Margin
Break-Even Patient Visits = $9,788,000 / Weighted Average Contribution Margin
6. Now, calculate the break-even point in terms of the number of patients:
Break-Even Patients = Break-Even Patient Visits / Number of Days Open per Year
Given that the clinic is open 312 days per year:
Break-Even Patients = Break-Even Patient Visits / 312
Interpretation of the break-even analysis:
The break-even analysis determines the number of patients needed for the outpatient fertility clinic to cover its total costs. In this case, it calculates the number of patients required to reach a point where revenue equals expenses, resulting in no profit or loss.
To determine if the project is profitable, compare the break-even number of patients to the projected patient visits per year. If the projected number of patients is higher than the break-even point, the service is considered profitable since the clinic can cover its costs and generate revenue. However, if the projected number of patients is lower than the break-even point, the service may not be profitable.
Based on the given information, the projected patient visits per year are 7,488. To determine if the break-even analysis supports moving forward with this business, compare the projected patient visits to the break-even patients. If the projected patients are higher than the break-even point, it suggests a potential for profitability and may support moving forward with the business.