Break Even Analysis

Topics: Variable cost, Costs, Management accounting Pages: 3 (758 words) Published: November 29, 2010
Break Even Analysis
University of Phoenix
Accounting in Healthcare
November 26, 2010

Break Even Analysis

Relevance of DRG Analysis as a Tool in Healthcare

DRG analysis helps managers in health care determine levels of service at which to operate and to break even as well as avoid any loses. Using the DGR analysis, management will be able to determine the appropriate levels at which to operate making the most of any profits (Steven, & David, 2000). The management team of the health care organization will able to determine the level at which marginal costs are at a minimum hence maximizing profits on services in excess of the break even figure. Using the DRG analysis, the organization will be able to arise with strategies that minimizes costs and operate at levels of service above the break-even point so that the organization does not incur any losses in revenue.

Calculation of Break Even Points

Contribution = sales – variable cost

Therefore, contribution margin for each DRG is calculated as follows:

Figures (/unit) DRGMDRGJDRGP

Sales (in $) 17002600900
Less Variable cost ($) (1000)(1200)(600)
Contribution ($) 700 1400 300

Required time in hours 2 5 1
Hence contribution per hour = $700/2= $350 $1400/5= $280 $300/1= $300

Weighted average contribution margin:
Contribution margin;
DRGM = (700/1700) ×100= 41.18%

DRGJ = (1400/2600) ×100 = 53.85%

DRGP = (300/900) × 100 = 33.33%

Therefore, weighted average contribution margin (based on the proportions) is given by 0.4118× 0.5 +0.5385×0.3 +0.3333× 0.2 = 43.41% The break even volume of the organization based on the weighted average contribution is given by total fixed cost per unit contribution (Michael, & John, 2010). BEP = TFC = 890000 + 830000

= $3962220
Therefore, at break-even point:

DRGM (50% proportion) = $1981110 or $1981110/1700 =1165...

References: Finkler, S., & Ward, D. (2006). Accounting Fundamentals for Health Care Management. Sudbury, MA: Jones and Bartlett.
Finkler, S., Ward, D., & Baker, J. (2007). Essentials of Cost Accounting for Health Care Organizations (3rd ed.). Sudbury, MA: Jones and Bartlett.
Michael, C., & John, W. (2010). Breakeven Analysis. London: Globe Pequot Press.
Peri, H. (2008). The Small Business Start-up Kit. Oxford: Oxford University Press.
Steven, A., & David, M. (2000). Cost Accounting for Healthcare Organizations: Concepts and Applications. New York: Jones & Bartlett.
University of, P. (2010). Break even Analysis
William, O., & Paula, H. (2010). Essentials of Healthcare Finance. New York: Jones & Bartlett.
University of Phoenix (2010). Break Even Analysis. Retrieved November 22, 2010, from University of Phoenix ACC561 website.
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