The Crimson Press Curriculum Center

First Page and the Assignment Questions:
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.

The Meeting

At the meeting, several issues arose that Thomas had not anticipated, and a rather hostile atmosphere developed. Dr. Mosteller pointed out that 13,800 visits was the maximum her program could accommodate, given current space, and wondered exactly how Mr. Thomas expected her to increase the program's number of visits. Dr. Olivo said she would be happy to expand her program by another 4,000 visits, but in order to do so, she would need to hire another nurse practitioner (NP), at a cost of $62,000. She wondered how Mr. Thomas might include this fact in his analysis, and, under the circumstances, whether the NP should be considered a fixed or a variable cost. Dr. Harris told Mr. Thomas that he had been planning all along to add another 4,000 visits to his program, and wondered why Mr. Thomas had not checked with him about this prior to preparing the figures and the chart. He too would need to hire another nurse practitioner, however, at a cost of $65,000, and also wondered whether this was a fixed or variable cost.
Ms. Fineberg seemed quite perplexed by the discussion, and began her comments by asking Mr. Thomas why he was using averages when the center had three separate programs. She also indicated that $3,032 was far too low a surplus, since she was hoping to have some extra money available during the year for painting and some minor renovations, which would cost about $50,000. She asked Mr. Thomas how he might incorporate this need into his analysis. She also expressed some concern about Mr. Thomas's per-patient fees, stating that in conversations with people in other centers she had learned that Abbington's fees were about 10 percent below what others were charging. She thought an across-the-board increase to make up the difference was called for.

Finally, all three program coordinators queried Mr. Thomas about his variable-cost-per-patient figure. They asked him how he had derived these figures and whether they included some recent price increases of about 5 percent in medical and nursing supplies. Mr. Thomas stated that they included both medical and nursing supplies, divided about 75 percent/25 percent between the two, but he confessed that he had not included any price increase in his calculations.

Next Steps

The meeting ended on a less-than-happy note. Mr. Thomas had not had an opportunity to give his lecture, the program coordinators felt frustrated that their concerns and plans had not been included in his analysis, and Ms. Fineberg was quite upset because it appeared as though the center would not have the funds necessary to pay for the much-needed painting and renovations.

Mr. Thomas returned to his office and wondered whether his decision to work at the center had been a wise one. Perhaps, he thought, life would be simpler in a manufacturing firm.

Assignment

1.     What assumptions are implicit in Mr. Thomas's determination of a breakeven point?

2.     Using the data in Exhibit 1, calculate a breakeven point for each of the three programs? Why is the sum of these three volumes not equal to the aggregate breakeven volume?

3.    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?

4.    Based on the information in Exhibit 1, Ms. Fineberg is considering eliminating the Internal Medicine Program. What advice would you give her?