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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

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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