SIX-MONTHS PROJECTION OF REVENUE AND EXPENSES
REVENUE
FEES 248,000
PREMIUMS 95,000
OTHERS 110,000
453,000
EXPENSES
COMPENSATION AND BENEFITS 120,000
DIBEATES COST AND DRUGS 190,000
FOOD SUPPLY 70,000
OTHER EXPENSES 70,000
TOTAL VARIABLE COST 450,000
CONTRIBUTION MARGIN 3,000
FIXED EXPENSES 380,000
In business, budget involves a plan that the hospital will employ to determine the difference between the outgoing expenses and the incoming revenues. The budget will help ensure proper use of the available resources as previously planned without exceeding the budget. It also helps in the justification of the appropriate use of the funds, and this will assist in the future funding.
BREAK EVEN point is that point where the hospital will make no profit or loss (Catanzaro, 2016). At this point, the revenue of the hospital will be equivalent to the total cost incurred by the hospital and the fixed costs equal to the contribution margin (Kumar Choudhary, Kumar Patnaik, Madhusudan Singh, & Kaushal, 2013). From the data above contribution margin is given to be the difference between revenue and variable expenses i.e. 3,000.
Break-even point for the hospital for six months will be, total fixed costs divided by the contribution margin for the semester, i.e., fixed expenses÷ contribution margin
=380,000 ÷ 3,000 = 126.667
These approximately 126 patients in six months
Break-even point tends to answer the question at what point in the admission of the patients is the hospital going to make the profit. Break-even analysis will provide insight of how the profit will change for the hospital based on the patients admitted within the six months. It’s never easy to draw such a conclusion because of the many services and drugs offered by the hospital and the hospital many patients that come for treatment. Most importantly in the break-even analysis is the relationship between revenue and expenses of the hospital, how the expenses are likely to change based on the increase or decrease of the revenue. Variable expenses as shown in the data above increases when the revenue increases and vice versa. It means variable costs are proportional to the revenue received by the hospital. On the other hand, fixed costs do not change even when changes are experienced in the income earned.
Contribution margin is also a vital component of the break-even analysis, and its calculation demonstrated in the above data. It shows that the variable costs have covered and that each patient treated in the hospital should pay the total sum of three thousand (3,000) toward the service to the management toward the hospital’s fixed cost of 380,000 for six months. After this fixed cost for six months has been covered the hospital should be in a position to make a profit of 3,000 per patient treated in the hospital. The figure 126 patients of the break -even point is the number of patients to be attended to by the hospital to cover the hospital variable and fixed costs.
Sources of funds for the hospital are financial advice and the management fees earned from the investments of the hospital that include structural investments and fees received from the administrative services. Premiums, these include property-causality premium insurance, life and health that focus on the disability and the longer term health care insurance and annuities that are immediate and with a component of a contingent life feature. Auto home insurance premiums realized over a period of coverage. Other sources of funds include revenue assessed on variable and fixed global life insurance related annuities, insurance charges costs, life insurance products. Rider fees from variable annuity and related administrative charges against account and balance contract holders. Other revenues include those of partnership that is limited.
Related expenses incurred and serviced by the hospital include, the operational costs majorly benefits and compensation expenses where the majority are distribution channel compensation related, fixed annuities, and advantages and losses provisions drugs protection. Other expenses for the hospital include information technology related costs, communication, advertisements and facilities expenses.
Unfavorable variance in the hospital data provided above is the diabetes costs and drugs. The difference between the actual experiences statistically as provided in the attached paper, 23 billion was used for the direct and indirect cost to prevent the rising diabetes prevalence in the year 1969. The budget rose to 174 billion in the year 2007 and from the above hospital data, it shows that the amount used is 190 billion. It means the actual amount spent exceeds the budgeted amount by 16 billion. Diabetes cost and drugs are therefore not neutral to the budget, and this is alert to the hospital management the hospital’s profit will be less than expected. The earlier unfavorable variance is detected, the better for the hospital management, the management should, therefore, and direct attention at fixing the diabetes disease problem before it gets out of hand.
Cost-utility economic analysis appropriately is the best financial analysis that will address and track the costs expenses for the hospital and how best to approach even the unfavorable expenditures in the above data of the hospital (Rouwendal, 2012). Cost-utility will help in the financial measurement and determination of the allocation of the resources to the hospital and how beneficial they will be to the health of the patients attended to by the hospital. Cost-utility is a relevant measure in this case because it helps in determining the value of the patients’ visits to by the hospital. Cost-utility is not only measuring in monetary terms but also using other health measurements like injuries. To determine if the monies put in the projects will be beneficial to impact positively on the patients of the hospital will calculate the cost-effectiveness ratio. Calculated by dividing all the benefits of the hospital by the expenses incurred by the hospital. The lower the ratio, the more sufficient the monies will be of help to the patients.
Cost-effectiveness ratio = 453,000 ÷ 450,000 =1.0066.
This ratio is small and therefore money resource will be very useful in helping the patients at the hospital.
References
Catanzaro, T. (2016). Break Even Analysis. J Glob Econ, 4(2).
http://dx.doi.org/10.4172/2375-4389.1000190
Kumar Choudhary, P., Kumar Patnaik, S., Madhusudan Singh, M., & Kaushal, G. (2013).
Break-Even Analysis in Healthcare Setup. International Journal Of Research Foundation Of Hospital And Health Care Administration, 1, 29-32. http://dx.doi.org/10.5005/jp-journals-10035-1006
Rouwendal, J. (2012). Indirect Effects in Cost-Benefit Analysis. Journal Of Benefit-Cost
Analysis, 3(1). http://dx.doi.org/10.1515/2152-2812.1046
