Define break even analysis and its importance in the health care industry.After much analysis and market studies the two are ready to present their findings to the board. You are the Finance Director who has put the information together.
Case Study #1 – Break Even Analysis

Scenario: (hypothetical)

Break-even exercise

Break-Even Analysis or Cost Volume Profit Analysis (CVP)

The California Medical Hospital is a full service hospital in Burbank, CA. Kathy Potts, the Chief Surgeon and Regina Johnson, the Hospital Administrator, have been working on a project to bring a new product to their hospital, knee replacements, to expand the services provided in hopes of bringing in additional revenue.

After much analysis and market studies the two are ready to present their findings to the board. You are the Finance Director who has put the information together.

They have decided that a new knee replacement will cost $17,000. The supplies used will cost the hospital $9,500 and the selling expenses paid amount to $3,000 per knee. The wing they will use will rent for $15,500 per month and the surgeon will receive a fixed salary of $25,000 per month. (Show your work on all problems)

Determine the number of knee replacements (in units) that particular wing must perform each month to break even. (Break-Even Point or BEP). In other words how many knee replacements must the surgeon perform each month to break-even?
Determine the number of knee replacements that particular wing must perform in order to generate a profit of $100,000 per month.
Assume that the surgeon can now open a clinic on his own with the following costs:
Variable costs = $9,500 per knee

One additional employee at a cost of $1,000 per month

Everything else remains the same from above (The rent becomes the mortgage payment, the surgeon will accept the same salary, and the SP is still $17,000)

Determine the number of knee replacements to break-even.

Determine the number of knee replacements needed to generate a profit of $100,000 per month
What scenario would you recommend and why?

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