The Crimson Press Curriculum Center

First Page and the Assignment Questions:
    In January, 2001, Donald Hoover, field manager of Springfield Visiting Nurse Association was deciding whether to employ full time nurses or to subcontract for nursing services on a per-visit basis from a local agency. Inasmuch as Springfield was experiencing some financial difficulties due to a recent shortage of nurses, Mr. Hoover knew that this decision could have some important consequences for the organization’s financial viability.

BACKGROUND

   Springfield VNA was a large home health agency. Begun in the late 1970s, Springfield had enjoyed remarkable growth during the decades of the 1980s and 1990s. Its revenues had increased tenfold between 1990 and 2000, and its workforce had quadrupled. With the growth in activity, Springfield had outpaced its management capabilities. During 2000, the company had lost money, due in large part to a lack of good controls on costs, and some poor decisions with the use and management of contract nurses.

   It was because of these financial difficulties that Mr. Hoover had been hired. He began work shortly after receiving his MBA from a local university. While an undergraduate student, he had worked as an emergency medical technician during the school year and with a home heath agency during the summers, where he had served in a variety of capacities. He thus was quite familiar with the clinical side of the business. This familiarity, coupled with his MBA skills, was just what Springfield needed to get its financial house in order. Mr. Hoover had been hired with the explicit mandate to put the company on a sound financial footing.

   Springfield was organized into several divisions, one of which was the nursing division. Other divisions included home health aides, physical therapy, and social services. The home health aides assisted clients with daily living activities such as bathing and eating. Physical therapy assisted clients with recovering their normal physical functioning, such as walking. The social service staff did counseling with those patients who were having a difficult time adjusting to a homebound life. The nursing division took care of the clinical needs of Springfield’s patients (such as changing dressings on wounds or giving injections). The division was expected to make a sizable contribution to the company’s overhead costs. During the past two years, however, the division’s contribution had fallen considerably, and had actually been negative during the most recent quarter.

REVENUE AND EXPENSES

   The fixed costs directly associated with Springfield’s nursing division were estimated to be $9,000 a month for rent and other expenses. The variable costs of supplies (measured on a per-visit basis) were expected to be $30. Mr. Hoover believed that the program could earn revenue of $200 per visit per nurse. Nurses averaged six visits a day.

   In terms of personnel, Mr. Hoover saw two options. The first was to hire full time nurses to meet expected demand each month. Each nurse would work a maximum of twenty days per month. His or her monthly salary would be 6,000, regardless of the number of visits actually made during the month.

Assignment

1.   Calculate the breakeven point for each option. Why do these breakeven volumes differ?

2.   Which option is preferable? Why?

3.   Assuming the quarterly data represent the pattern for the upcoming year, how should Mr. Hoover staff the division so as to maximize the VNA’s surplus?

4.   What other factors or options should Mr. Hoover consider?