BREAK-EVEN ANALYSIS Break-even analysis is essential for identifying the point at which a business can be expect to recover the investment cost, that is, when revenue would equal costs (Nurse Leader Insider, 2012). It is always important to conduct a break-even analysis before starting any business. The rapid growth of health care sector makes it essential for health care decision makers to have an understanding of economic and financial implications of decision making (Health Administration for non-HA Trainees, 2006). The calculation of break-even point is an essential tool for analysis of vital profitable factors for a business including the sales volume, the average price of sales, and the average production cost. The selection of right equipment and having an appropriate understanding of its costing (maintenance and upfront) as well implications of tax is essential when an equipment is purchased or leased. Break-even analysis is a critical tool that assess in determining the decision making regarding purchase or lease of an equipment. The understanding of break-even point greatly helps investors when they buy or lease an equipment for their business in determining the profitability of their investment. An Example of a Break-Even Analysis Conducted in Health Care Organization There is a non-profit healthcare organization, XYZ, that operates in the mid-western state which is required to develop a new satellite Centre in order to serve a developing residential region in its service area (Austin & Boxerman, 2003). XYZ has partnered with ARGO industries which provides comprehensive healthcare services to its workers on the basis of capitated compensation per year. The plan was to be supplied with one of the two health insurance alternatives to the 2000 ARGO personnel. The financial officers at XYZ made an assessment of the cost associated with the innovative health facility. This includes cost of construction ($2,000,000), capital equipment ($500,000), fixed annual operating expenditure ($400,000), and variable yearly operational case per 100 enrollees in the project ($160,000). The human resources department of the ARGO has proposed to contract with XYZ in a twelve-monthly capitated payment of $2000 per enrollee in the plan with initial annual enrolment of 1500 workers (W). A Strategic Assessment of the Sample Break-Even Analysis Break-even analysis should be conducted by the management of XYZ prior to beginning of the setting up the whole planning of the project so that the questions about the project could be accurately answered. A break-even analysis would help in deciding prices; formulating goals to accomplish, and planning for future expansions (Egan, n.d.). Revenues that are higher than the expenditure would generate profits. The break-even point is depicted in the figure A shown below at point O. The figure illustrates that the total revenue and cost are equivalent. Profits will be generated above the point O while below this point, there would be loss in the project. Cost and Revenue Total Revenue (TR) Total Cost (TC) Fixed Cost (FC) O (Break-Even Point) Service Volume Figure A The calculation of break-even point for the planned project would require computation of some set of data from existing information system, estimations, and surveys. The calculations are as follows: Total Revenue (TR) = 2000 × W Fixed Cost (FC) = 650,000 Variable Cost (VC) = 1600 × W Total Cost (TC) = FC + VC = 650,000 + 1600W The total cost would be equal to the total revenue at the break-even point. Thus, 2000W = 650,000 + 1600W 2000W – 1600W = 650,000 400W = 650,000 W = 650,000/400 = 1625 Workers are required to reach break-even point. It was predicted by ARGO that 1500 enrollees will sign up; however, the $2000 employee contract would not sufficient for making profit for the facility. Thus, a loss will occur. The calculation for the loss suffered for the 1500 enrollees is as follows: TR = 2000 × 1500 = 30,00,000 TC = 650,000 + (1600 × 1500) = 30,50,000 Loss = TC – TR = 50,000 Thus, there is a need to invite more enrolees in order to break-even. The number of extra enrolees required is 125 (1625 – 1500). XYZ would now need to agree on a higher bid per enrolees to breakeven. The higher bid can be calculated as follows: TC = TR = FC + TC TR = FC + VC Rev × W = FC + (Cost × W) Rev × 1500 = 650,000 + (1600 ×1500) Rev = 30,50,000/1500 = 2034 Thus, to break-even, $2034 is required per enrollee for 1500 enrollees. An Analysis of the Financial Data in the Sample Break-Even Analysis There is a rise in both expenditure and revenue by a fixed sum for every unit of extra service as indicated by the figure A. There are three types of costs linked with the break-even analysis, that is, indirect (unaccountable or any cost object such as product facility, function, or project), variable (expenses directly associated with costs of care provision), and fixed (includes cost of equipment, facilities capital, and overhead costs) cost. Evaluation of the Probable Expectations of Stakeholders Surrounding this Break-Even Analysis The stakeholders are mainly expected to make enough income by the facility so that the cost of service provision could be paid. It is essential for the company to consider the break-even analysis else it would be difficult for it to make significant strategic decisions. The Decision to Move Forward Based on the Sample Break-Even Analysis XYZ needs to evaluate the potential capacity to attract 125 extra enrolees in their first year of operation to break-even or it could negotiate to a higher capitation amount from ARGO with a $2,034 per enrollee. This is essential to meet the costs of the new satellite Centre. How to Use the Sample Break-Even Analysis to Make Long-Term Financial Decision The management could use this break-even analysis for making some important long-term financial decisions. Some of the important implications of this break-even analysis are as follows: • To estimate the potential for extra enrolees if the Centre is built by conducting extensive market research. • To hold further discussions with ARGO about the potential of increasing the amount of capitation for expected workers to be enrolled in the plan. • To consider the likelihood of operating at a loss in the first operating year and sponsor their services from other revenue or operating sources. Assessment of the Potential Financial Impact of the Sample Break-Even Analysis Break-even analysis would be a beneficial tool for determining the volume of services needed for ensure that the generated revenue will outweigh the expenditure costs. An important element in the management of finances in the organization would be to match the provision cost with the revenues. This could eventually improve the health in community by creating a positive influence on patient care. References 1. Nurse Leader Insider., (2012, March). Tool of the Month: Example of a Breakeven Analysis. Retrieved from http://www.hcpro.com/NRS-277546-868/Tool-of-the-month-Example-of-a- breakeven-analysis.html 2. Health Administration for Non-Health Administration Trainees., (2006, December). Financial Management Overview: Health Services & Applications to Neurodevelopmental Disabilities & Related Disorder in Children. Retrieved from http://www.aucd.org/docs/lend/dir_mtg/2006mar/ha.pdf 3. Egan, C. (n.d.). Break-Even Analysis 101: How to Calculate BEP and Apply It to Your Business. Retrieved from https://squareup.com/us/en/townsquare/how-to-calculate-break-even-point- analysis#:~:text=In%20other%20words%2C%20you%20should,just%20useful%20for%20startu p%20planning 4. Austin, C. J., & Boxerman, S. B. (2003). Information systems for healthcare management. Health Administration Press. Name: Description: ...