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Conducting a Break-Even Analysis

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Conduct Break-Even Analysis in the following two scenarios:

1. R Squared is a mobile diagnostic imaging company that performs MRI scans of patients at hospitals and clinics that cannot afford their own scanners. General Hospital has contacted R Squared regarding a contract for services. Accountants at R Squared have calculated the variable cost per scan at $1,200. The fixed cost per month is $90,000 (Cost of MRI lease payments and service). The accepted price charged in the community for an MRI scan is $2,100.

R Squared must charge General Hospital $200 less than the community price in order to get the contract.

1. Approximately how many patients must R Squared scan at General Hospital to break even for a given month?

2. Approximately how many patients will General Hospital have to guarantee for R Squared to make a monthly profit of $10,000?

3. Assuming that General Hospital can guarantee 125 patients per month, will R squared accept the contract?

4. If not, what can General Hospital or R Squared do to reach an agreement?

2. General Hospital has an inpatient volume of 482 per month and an outpatient volume of 836 per month. General Hospital receives money from three categories of payers - 30% are Cost Payers and pay $1,800 per scan. 45% are Charge Payers and pay $1,200. The remainder are Fixed-price Payers who pay $1,500. Assuming variable and fixed costs are the same as the previous scenario:

5. Approximately how many patients will have to be scanned for General Hospital to make a profit of $20,000 per month?

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Solution Summary

A break-even analysis is performed for two scenarios.

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1) Break Even = fixed cost / contribution margin
contribution margin = price - var cost
Break even patients = 128.57
Rounding Up 129 ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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