The breakeven point is the production level, at which total revenues for a business equal to total expenses or costs (Reiter & Song, 2018). Breakeven point if important because it means a business can meet the full costs of production from the revenues being generated without making any profit (Reiter & Song, 2018).. In Accounting terms, breakeven is defined as the volume of products needed to produce a profit of zero. Economically, breakeven is the volume that creates revenues equal to the total accounting costs (these are fixed costs and variable costs) in addition to a targeted profit amount (Penner, 2016).
The profit formula is stated as
Total Revenues-Variable Costs – Fixed Costs = Profit.
To derive breakeven point, from this profit formula:
Total Revenues-Variable Costs – Fixed Costs = 0.
Whereby Total Costs = Variable Costs + Fixed Costs
At breakeven, Total Revenues = Total Costs, meaning Profit = 0
Total Revenues -Total Costs = 0 is referred to as the breakeven point.
Using the example given in Exhibit 5.8 on page 152;
Revenues = $400,000, Revenue per visit = 400,000/10,000 = $40 while Variable Costs (consisting of medical supplies) = ($50,000/10,000 patient visits) = $5 per patient visit.
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Fixed Costs = 5,000 + 220,000 + 30,000 + 2,500 + 10,000 (rent, wages & benefits, depreciation, utilities and administrative supplies) = $267,500
At the breakeven point;
Total Revenue-Variable Costs-Fixed Costs = 0;
(Volume×40) - (Volume×5) - 267,500 = 0
Using algebra;
(40-5)×Volume = 267,500 which is 35 × Volume = 267,500
$35 is then the Contribution Margin ( Gallo, 2014 )
Now, Volume = 267,500/35 = 7,642.8 approximately 7,643 patient visits At breakeven 7,643 patients will be required to visit to ensure exactly all the total costs have been covered by the total revenues for that period, i.e. Total Revenues=Total Costs.
To prove this, the person visits figure of 7,643 can be substituted in the Profit formula;
Total Revenue-Variable Costs-Fixed Costs = 0;
This can be expanded as
(Patient visits × $40) – (Patient Visits × $5) – Fixed Costs ($267,500) =0
(7,643 × 40) – (7,643 × 5) – 267,500=0
7,643 × (40-5) – 267,500 = 0 translating to 7,643 × 35 – 267,500
267,505-267500 = ~ 0 (approximately equal to 0, hence proved)
To make a target profit of $100,000
(Contribution Margin × Patient visits) – Fixed Costs = 100,000
(35 × Patient visits) - 267,500 = 100,000
35 × Patient visits = 100,000 + 267,500
Patient visits = 367,500/35 = 10,500 patients visits will be needed to visit so as to achieve a target profit of $100,000.
With the projected 10,000 visits for the first financial year in Example 5.8,
Profit = Total revenues - Variable Costs - Fixed Costs
Hence,
Profit = 400,000 - 50,000 - 267,500 = $82,500
The breakeven point is when the clinic can receive 7,643 patient visits. The hospital makes zero profits, but the revenues generated are just sufficient enough to cover for both variable and fixed costs of running the clinic. With a target profit of $100,000, the clinic will require 10,500 patient visits to realize this profit. From the projected financial statement given in Exhibit 5.8, the clinic can make a profit of $82,500 from 10,000 patient visits.
I would, therefore, recommend this project to go on because, in the first year, they can breakeven and make an economic profit of $82,500.
References
Gallo, A. (2014, November 2). A Quick Guide to Breakeven Analysis. Retrieved October 17, 2019, from https://hbr.org/2014/07/a-quick-guide-to-breakeven-analysis.
Penner, S. J. (2016). Economics and Financial Management for Nurses and Nurse Leaders . Springer Publishing Company.
Reiter, K., & Song, P. (2018). Gapenski's Fundamentals of Healthcare Finance . Chicago, Illinois: Association of University Programs in Health Administration. ISBN 9781567939750
