Getwell_Clinics_Breakeven_Analysis

The Beach Street office of Getwell Clinics specializes in the treatment of three types of patients: DRG M, DRG J, and DRG P (Getwell, 2011). Doctor Barkley has requested an analysis to determine the breakeven points for each DRG and which one is more profitable (Getwell, 2011). Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost (Accounting for Management, 2011). This concept is further explained by the following equation: [Break even sales = fixed cost + variable cost] (Accounting for Management, 2011). DRG is a Diagnosis Related Group is a unit of classifying patients by diagnosis, average length of hospital stay, and therapy received; the result is used to determine how much money health care providers will be given to cover future procedures and services, primarily for inpatient care (Medical Dictionary, 2011). The relevance of the DRG Analysis is to find a cost effective solutions in relation to new business contributions. Decision making is an essential leadership skill. This DRG Analysis gives management the ability to measure accurate cost and to help develop a financial planning strategy. To analyze the different DRG products, M, J and P, as viewed by their costs, behavior, and how these costs eventually affect the bottom-line. One of the most useful management decision tools as viewed by the relationship of costs and profit is the cost-volume-profit analysis. This tool aids management in visualizing the impact of volume and costs on profit (Finkler, & Baker, 2007). The table below gives a much broader viewpoint of the data use to bring each portion of the analysis into perspective. DRG Proportion Charge Variable Cost Fixed Cost Time Study M 45% $2,000 $1,000 $850,000 3 hours J 30% $3,000 $1,500 $800,000 4 hours P 25% $1,200 $300 $100,000 1 hours Joint Fixed Costs $1,560,000 Table A 100% $3,310,000 The table below will show the breakeven points that are measured by treatment numbers for each DRG. This table will also show the weight average contribution margin approach. Getwell Clinics DRG M DRG J DRG P Proportion 45% 30% 25% Charge/Selling Price $2,000 $3,000 $1,200 Variable Cost $1,000 $1,500 $300 Contribution Margin = Selling Price-Variable Expense Per Unit Contribution in Dollars $1,000 $1,500 $900 Fixed Cost $850,000 $800,000 $1,000,000 Time Study 3hr 4hr 1hr Per Hour Breakdown = Contribution Margin/Time Study Per Hour Breakdown $333 $375 $900 Breakeven Point = Fixed Cost/(Unit Selling Price- Variable Costs) Breakeven Point $850 $533 $1,111 Contribution Margin = Contribution/Sales *100 Contribution margin in % 50% 50% 75% Weight Average Contribution Margin = Contribution Margin, DRG M *Proportion + Contribution Margin DRG J* Proportion + Contribution Margin DRG P * Proportion Weight Average Contribution Margin = 56.25% Contribution Margin = Sales Break up $3,310,000\56.25% = 1,861,875 Sales Break up Breakeven = Sales/ Per Unit Price DRG M = 1,861,875*.45 = $837,843.75 $837,843.75/$2000 = 418 treatments DRG J = 1,861,875*.30= $558,562.50 $558,562.50/$3000 = 186 treatments DRG P = 1,861,875*.25 = $46,546.75 $46,546.75/$1200 = 38 treatments The DRG that must be promoted in an advertising program if the office has excess capacity is DRG P. DRG P has a profit of $1111 per hour, unlike DRG M $850,and DRG J $533. DRG P must be promoted in an advertising program based on its given rationale. DRG P must be promoted if the office is almost at maximum capacity in terms of available hours. DRG P takes the least amount of time and offers the most profit out of the DRGs. The rational for using DRG as an approach to allocating cost is each DRG is seen as a separate cost and therefore the common fixed cost can be allocated to that DRG. Various cost basic which can be used are sales, contribution per hour or a standard rate. In conclusion the joint fixed cost allocated to the three DRG services are based on the total of hours devoted for each service. This takes into the account the relationship of the cost that is allocated and for the services that is rendered. References Accounting for Management (2011). Breakeven Point Analysis Definition, Explanation Formula and Calculation. Retrieved November 20, 2011 from http://www.accountingformanagement.com/Break_even_analysis.htm Finkler, S. A., Ward D. M., & Baker, J. J. (2007). Essentials of cost accounting for health care organizations (3rd edition). Sudbury, MA: Jones and Bartlett Getwell Clinics Breakeven Analysis (2011). Student Webpage University of Phoenix Medical Dictionary (2011). Diagnosis- related group. Retrieved November 21, 2011 from http://medical-dictionary.thefreedictionary.com/DRG