Breakeven Analysis (4)
Posted on May 12, 2009 - Filed Under Finance
This breakeven analysis contains important assumptions. The first assumption is that the price or set of prices for different types of patients and different payers is independent of volume. In other words, volume increases are not attained by lowering prices, and price increases are not met with volume declines. The second assumption is that costs can be reasonably subdivided into fixed and variable components. The third assumption is that both fixed costs and the variable cost rate are independent of volume over the relevant range, so both the total costs and total revenues lines are linear.
Breakeven analysis is often performed in an iterative manner. After the breakeven volume is calculated, managers must determine whether the resulting volume can realistically be achieved at the price assumed in the analysis. If the price appears to be unreasonable for the breakeven volume, a new price has
to be estimated and the breakeven analysis repeated. Likewise, if the cost structure used for the calculation appears to be unrealistic at the breakeven volume, operational assumptions and hence cost assumptions should be changed and the analysis repeated again.
Both concepts—the projected P&L statement and breakeven analysis —are consistent with the broader intent of CVP analysis, which is to estimate relationships between cost, volume, price, and profit. To take this logic a step further, the base case projected P&L statement and the breakeven point are only two points on a continuum of possibilities. Instead of asking the number of visits needed to break even, Atlanta’s managers may ask the number of visits needed to achieve a $100,000 profit or, for that matter, any other profit. They know that the clinic will have a $419,038 profit if it has 75,000 visits and that
it will have no profit if it has 69,165 visits.
Taken From : HEALTHCARE FINANCE
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