Xiong Yin, a recently graduated M.B.A., had been hired three months ago as Assistant Director of Jiao Tong Hospital. Prior to earning his M.B.A., he had worked in several manufacturing firms, but he had never worked in a hospital. He knew little about Jiao Tong’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 hospital’s attempts to provide high-quality health care for the residents of his community.
Despite his lack of experience in hospitals, Mr. Xiong had brought some much-needed management skills to the hospital’s operations. In his short tenure with the hospital 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 hospital’s director, Furong Huang, and the physician coordinators of the hospital’s three outpatient programs: Cheng Liew (Obstetrics and Gynecology), Min Li (Pediatrics), and Chao Yang (Internal Medicine).
Mr. Xiong 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 hospital’s three outpatient programs (see Exhibit 1). Using this information, he determined that each outpatient visit contributed ¥40,703 to fixed costs after covering its variable costs. Given fixed costs of ¥2.185 million (¥1.385 million in the programs and ¥800,000 for the outpatient department overall), he had calculated that 53,645 visits were needed to break even.
He had prepared a breakeven chart that 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 outpatient visits were almost exactly at breakeven, which did not allow any margin of safety, and to encourage the program managers to increase the activity in their programs by a few patient visits each so as to provide a more comfortable margin of safety, and, if all went well, a surplus for the hospital. . . .
Assignment
- What assumptions are implicit in Mr. Xiong’s determination of a breakeven point? Be sure you understand how he arrived at the figure of 53,645 visits. What is your assessment of the utility of this figure?
- 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 outpatient department? What is it for each of the three programs? Which is the more useful figure?
- Based on the information in Exhibit 1, Ms. Furong has decided to eliminate the Internal Medicine Program so as to improve the hospital’s surplus. What advice would you give her?