Mark Thomas, a recently graduated M.B.A., had been hired three months ago as assistant director of the Abbington Health Center. Prior to earning his M.B.A., he had worked in several manufacturing firms, but he had never worked in a healthcare organization. He knew little about Abbington's programs or the healthcare matters that concerned the professional staff, but had decided to take the job since he had been impressed with the center's attempts to provide high-quality health care for the residents of his community.
Despite his lack of experience in organizations like Abbington, Mr. Thomas had brought some much-needed management skills to the center’s operations. In his short tenure with the center he not only had introduced some new management techniques, but had regularly made attempts to educate the professional staff in the use of those techniques.
This afternoon's staff meeting was no exception. In attendance would be the center's director, Helen Fineberg, and the physician coordinators of the center's three programs: Fiona Mosteller (Obstetrics and Gynecology), Joanne Olivo (Pediatrics), and Don Harris (Internal Medicine).
Mr. Thomas planned to instruct the attendees in the concept of breakeven analysis. In order to do so, he had gathered some data on the revenues and costs of the three programs (see Exhibit 1). Using this information, he determined that each patient visit contributed $40.38 to fixed costs after covering its variable costs. Given the fixed costs of $2,185,000 ($1,385,000 in the programs and $800,000 for the center overall), he had calculated that 54,111 visits were needed to break even.
He had prepared the breakeven chart, shown in Exhibit 2, which he planned to distribute to everyone at the meeting prior to giving a short lecture on the concept of breakeven analysis. His intent was to make clear to everyone that patient visits were almost exactly at breakeven, which did not allow any margin of safety, and to encourage the program coordinators to increase the activity in their programs by a few patient visits each so as to provide a more comfortable margin and, if all went well, a substantial surplus for the center.
1. What assumptions are implicit in Mr. Thomas's determination of a breakeven point? Which of these did the meeting change?
2. On the basis of the suggestions and comments made at the meeting, and making assumptions where necessary, prepare revisions to Exhibit 1. What is the new breakeven volume for the Center? What is it for each of the three programs? Which is the
more useful figure?
3.Based on the information in Exhibit 1, Ms. Fineberg is considering eliminating the Internal Medicine Program. What advice would you give her?