MHA 542 CT 2
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Jan 9, 2024
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COST-BENEFIT ANALYSIS RECOMMENDATION
Cost-Benefit Analysis Recommendation
Jessica Cook
Colorado State University Global
HCM 542: Healthcare Operations Management Professor Michelle Oddi
November 26, 2023
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COST-BENEFIT ANALYSIS RECOMMENDATION
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Cost-Benefit Analysis Recommendation
A new radiology service line is being considered at Simi Regional Hospital. When starting a new service the company will need to estimated the initial costs, along with fees and potential revenue that will be generated. A breakeven analysis can be conducted to help determine how long it will take to no longer see loss and yet not profit at that moment (Tannen, 2020). This proposal will utilize the breakeven analysis to compare two different investments proposals, therefore leading to the best decision based on the data discovered. Breakeven Analysis
Simi Regional Hospital will be introducing a new radiological service line and as a new manager the first step will be to evaluate the standard cost, fees, and reimbursement to understand when the hospital will break even. The fixed costs are estimated at $1 million dollars,
with an estimated reimbursement of $1500 per procedure performed. There also additional fees that will need be considered in the costs of each procedure, for this the providers salary us $340, and the operating expenses are $160 for each procedure performed. While reviewing the costs and estimated reimbursement it is important to evaluate at what point will the hospital break even in the costs of implementing the new radiological service line. A breakeven analysis can be conducted to help analyze the above estimates to find where the costs will begin to equal the return gained on the procedures (Langabeer & Helton, 2021). In the result the result will yield a net profit of zero dollars. By using excel and the estimates provided, table 1 will show the result of the breakeven analysis by using the goal seeking application. To breakeven the hospital will need to perform 667 procedures to zero the costs and revenue. Table 1
Radiology Service Line Breakeven Analysis
COST-BENEFIT ANALYSIS RECOMMENDATION
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Items
Amount
Fixed Costs
$1,000,000 Net reimbursement
$1,500 Per procedure
Providers Salary
$340 Per procedure
Operating Expenses $160 Per Procedure Number of Procedures
667 Total Cost $1,000,500 Total Revenue
$1,000,500 BEP
$0 Adjustments in Initial Investments
While establishing this proposal for costs, it will be beneficial to consider any alterations to the initial estimates provided. Semi Regional has discovered a way to reduce the initial $1 million dollar investment to $600,000. With the initial investment dropping, so to will the reimbursement
amount per procedure to $1200. By changing the new values into the excel equation for break even, table 2 will show that it will now only take 500 procedures to reach a break even point in costs. Table 2
Adjusted Cost and Reimbursement Breakeven Analysis
Items
Amount
Fixed Costs
$600,000 Net reimbursement
$1,200 Per procedure
Providers Salary
$340 Per procedure
Operating Expenses
$160 Per Procedure Number of Procedures
500 Total Cost $600,500 Total Revenue
$600,500 BEP
$0 Recommendation
Now that both analysis chart have been created, let us review the outcome of each investment by calculating the results of 1,000 procedures performed. Table 3 will evaluate the results of the $1 million investment and table 4 will evaluate the $600,000 investment.
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COST-BENEFIT ANALYSIS RECOMMENDATION
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Table 3
Table 4
Breakeven analysis is a vital tool to help make informed decisions about starting a new product (Hayes, 2023). However, there are limitations as the calculations don’t factor in how many procedures are being done in a period. I would recommend the $1 million dollar investment, if a valid number of procedures can be done in a pre-determined amount of time as it will generate more revenue. For example, a set goal of reaching the breakeven point in one year will mean the hospital will need to perform approximately 50 procedures a month. Approximately 2-3 procedures a day, if this is a realistic goal, then the hospital should move forward with the $1 million dollar investments. Conclusion
Based on the initial fixed costs, fees, and revenues provided the team has been able to utilize a combination of the breakeven point analysis with goal setting in excel to evaluate how many procedures it will take to reach the zero point of no loss nor profit. From here the company
will be able to better understand how many procedures it will take to achieve revenue. Though, the management team will need to establish and set what timeframe will be acceptable to wait to reach the breakeven point. If the determined number of procedures can be achieved, then it will be recommended for the company to move forward with the $1 million dollar plan. Thus, achieving a greater level of revenue once the hospital has achieved the first 600 procedures to reach the breakeven point.
COST-BENEFIT ANALYSIS RECOMMENDATION
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References
Hayes, A. (2023, September 29). Break-Even Analysis: Definition and How to Calculate and Use It.
Investopedia. Retrieved from https://www.investopedia.com/terms/b/breakevenanalysis.asp
Langabeer, J. & Helton, J. (2021).
Health Care Operations Management: A Systems Perspective
(3rd ed). Jones & Bartlett Learning.
Tannen, M. B. (2020). Introducing learning by doing into the break-even analysis model.
Journal
of Accounting & Finance (2158-3625), 20
(3), 11–19. https://doi.org/10.33423/jaf.v20i3.3006