Break Even Analysis

ACC/HC Week 3 GETWELL CLINICS OPERATING STATISTICS

DRG PROPORTION CHARGE WEIGHTED REVENUE WEIGHTED REVENUE

M 50% $1,700 (1700 X 0.5) $850

J 30% $2,600 (2600 X 0.3) $780

P 20% $900 (900 X 0.2) $180

TOTAL WEIGHTED REVENUE $1,810

DRG PROPORTION VARIABLE COSTS WEIGHTED VARIABLE COST WEIGHTED VARIABLE COST

M 50% $1,000 (1000 X 0.5) $500

J 30% $1,200 (1200 X 0.3) $360

P 20% $600 (600 X 0.2) $120

TOTAL WEIGHTED VARIABLE COST $980

Joint Fixed Costs (830,000 + 240,000) =$1960000

Breakeven point = 1960000

1810-980

Breakeven point = 2361.45

DRG Proportion Breakeven Point

M 50% 1180.73 1181 treatments is breakeven point

J 30% 708.43 709 treatments is breakeven point

P 20% 472.29 473 treatments is breakeven point

Which DRG must be promoted in an advertising program if the office has

excess capacity? Explain why?

DRG M J P

Sales Price 1700 2600 900

Variable Cost 1000 1200 600

Contribution Margin $700 $1,400 $300

DRG J has the biggest contribution margin and therefore must be promoted

Which DRG must be promoted if the office is almost at maximum capacity in terms of available hours?

ACC/HC Week 3

c M J P

Contribution Margin 700 1400 300

Time Required (hours) 2 5 1

Contribution Margin per hour $350 $280 $300

Since DRG M gives maximum contribution margin per unit of time, it should be selected

Which rationale may be used to support the use of DRGs as an approach to allocating costs?

By separating the DRGs you are able to keep them as separate cost centers and be able to

allocate common fixed costs to each DRG. If there is enough capacity to promote, the DRG

with the highest contribution margin should be promoted. If there is full capacity the lowest

fixed cost DRG should be promoted.