Finance and Management Case Study

I n t r o d u c t i o n t o t h e F i n a n c i a l M a n a g e m e n t o f H e a l t h c a r e O r g a n i z a t i o n s1 5 0

Related to costs per period, the breakeven point is the volume in units at which the total revenue line intersects the total cost line, or where total costs equal total revenues, as expressed by the equation

Breakeven quantity Total fixed costs Charge Variable costs per unit

= −

When classifying these costs in relation to a unit of product or service, fixed costs change in relation to volume, and variable costs remain constant per unit, as shown in Exhibit 6.6.

Exhibit 6.6 is somewhat unorthodox, but it is important to understand the relationship in this way to understand breakeven analysis. At any point on the volume axis, total costs equal variable costs per unit, which remain constant, plus fixed costs per unit, which decline as volume increases. Using costs per unit, the breakeven point in units or revenues is the point at which

fixed costs have been covered. Before that point, each unit sold has not only covered its variable costs, but has also contributed to fixed costs. This is called the contribution margin and can be expressed in dollars with the formula

exHIbIt 6.6 Costs per Unit

Fixed costs per unit

Volume

Ch ar

ge /C

os t

Breakeven point in revenue

Breakeven point in units

Variable costs per unit

Total revenue

Total costs

MInI-CASe STuDy✓

You are the administrator of a physician’s office practice, and

the physician owners have asked you for a presentation on im-

proving profitability without raising rates. Using both Exhibits

6.5 and 6.6, explain how profit can be increased.

00_Nowicki (2264).indb 150 6/10/14 2:16 PM

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EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 1/18/2019 12:05 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 867406 ; Nowicki, Michael.; Introduction to the Financial Management of Healthcare Organizations Account: shapiro