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Break-even and Cash flows

You are the chair of the budgeting team at a Health Care medical center and are in the process of approving the budget for the next few years. The following proposals have been made.

Proposal 1.
A psychiatric facility to operate in the medical center. The facility will provide services to patients on an outpatient basis. The facility will operate Saturday and Sunday to 8:00 am to 6 pm. The labor requirements will be one salaried physician per day; two nurses for each day and one medical assistant/front office staff member per day. The goal is to provide needed mental health services within the community. The proposal will require an initial outlay of $15,000 plus $75,000 per year fixed costs and an additional $40 in variable costs per patient seen at the clinic.

The financial projections for the clinic are as follows:

Initial investment/outlay $15,000

Variable costs mp; nbsp; $40/patient

Fixed costs $75,000/year

Price charged per visit $120/patient fixed for three years

# of patients projected in 1st year 500

Increase in # of patients 500/year for four years.

Anticipated cash flows [Y1: -35,000] [Y2: 5,000] [Y3:45,000] [Y4: 85,000]

Proposal #2

Lease of a CT scanning machine for operations 24 hours a day 7 days a week. The lease of the CT will obviate the need to purchase CT services from outside mobile CT units. This proposals will require a monthly lease, service and insurance payment of $50,000 and an additional variable cost of $500 per case. The medical center will have to pay the CT training and continuing education of its radiology staff of 8. There will also be a $26,000 cost in preparing a room for the CT scanner. This translates to a total initial outlay of $50,000

Financial projections of the CT scanner:

Initial investment/outlay $50,000

Variable costs $500/patient

Fixed costs $50,000/month

Price charged per visit $950/patient fixed for three years

# of patients projected in 1st year 1,000

Increase in # of patients 500/year for four years

Anticipated cash flows [Y1: -150,000] [Y2: 75,000] [Y3: 300,000] [Y4: 525,000]

1. Calculated and identify the point at which both proposals will break-even

2. Calculate and identify the point at which the cash flows of both proposals will payback all of the investments and losses and actually become profitable

Solution Preview

1. Breakeven point is when total revenues = total cost and is calculated as
Breakeven point in units = Fixed cost/unit contribution margin
Proposal #1
Fixed cost = $75,000
Unit contribution margin = Revenue per patient - variable cost per patient
= 120-40 = $80 per patient
Breakeven number of patients = 75,000/80 = 938 patients per year
Proposal ...

Solution Summary

The solution explains how to calculate the breakeven and the cash flows for the firm to be profitable

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