Advanced Technical Centers East Chestnut Regional Health System Case Study

In this part of the course, you will prepare a pro forma income statement for a new or revised product or service you recommend for East Chestnut Regional Health System.

Review Case Study: East Chestnut Regional Health System.

Pro Forma Income Statement for East Chestnut Regional Health: Please complete the following prior to preparing the pro forma income statement and budget. You will need the following information in order to prepare it.

Consumer Demographics page links https://data.census.gov/

https://www.usa.gov/statistics

https://www.bls.gov/bls/blswage.htm

MHACB/506 v2 East Chestnut Regional Health System Case Study: Breakeven Analysis Worksheet Breakeven Analysis in economics, marketing, and cost accounting refers to the point at which total cost and total revenue are equal. A breakeven point analysis is used to determine the number of units of a product or service that must be sold to cover total costs (fixed and variable costs). This means you have covered all of your costs at the number of units sold the formula calculates. The formula for breakeven analysis is as follows: Breakeven quantity = Fixed costs / (Sales price per unit – Variable cost per unit) Example of Breakeven Analysis: Your clinic wants to offer obstetrical services at your women’s center. Assume you know that a new suite of offices will need to be designed within your existing facility in which to provide the service. The cost for build out for these offices will cost $50,000. This is a one-time charge. This represents your fixed cost. Assume your OB physician cost is $70 per office visit of 15 minutes. The cost for your office staff per patient visit is $20 per office visit of 15 minutes. Supplies used per office visit is estimated at $10. The total variable cost associated with one office visit of 15 minutes is the sum of these charges ($70 + $20 + $10 = $100) or $100 per 15-minute office visit. Assume your clinic charges a total revenue of $200 per 15-minute office visit per patient. To determine the breakeven point for offering OB service at your clinic, plug these numbers into the formula: Break even quantity = $50,000 / ($200 – $100) = $50,000 / $100 = 500 patient visits. Therefore, given the fixed costs, variable costs, and revenue gained for each patient visit, your organization would need to provide 500 OB office visit to break even during the period of one year. Use this form to create your ECRHS Breakeven Analysis. Enter the projected numbers, following the formulas next to the line item. Breakeven elements are listed below write breakeven costs and revenue against each element: • • • • • Costs: Fixed costs (A set one-time cost that will be required to product or deliver a product or service, such as construction of new office or lab space. This occurs once, and does not vary based on the number of products or services delivered): Variable costs (Costs that repeat each time the product or service is manufactured or delivered, such as physician salary per procedure or visit, office staff salary per procedure or visit, supplies used per procedure or visit, calculated per individual visit): Revenue per Product or Service delivered (per visit): Breakeven Quantity Required (Fixed Costs / [Revenue per Unit – Variable Cost per Unit]): Copyright 2021 by University of Phoenix. All rights reserved. MHACB/506 v2 East Chestnut Regional Health System Case Study: Pro-forma Income Statement A Pro-forma Income Statement is an income statement that predicts income for your new or revised product or service you are recommending to East Chestnut Regional Health System (ECRHS) after one year. It shows the sales ECRHS expects to achieve during that period of time, along with the costs associated with that level of sales. The organization must cover the costs of products or services it delivers (Cost of Sales) and the marketing expenses we estimate to achieve those sales (We estimate these using 7% of total revenues). This will leave us with a projected profit. A good Pro Forma proves out a strategy by showing the expected revenue minus the expected costs and the resulting profit. Conversely, it shows that you can’t have $100,000 in forecast sales and $3 million in projected advertising, since that would result in a loss. This is a very simplified exercise to help you understand the concept of a Pro Forma Income Statement. In reality, you would provide a much more in-depth analysis of expenses. For instance, if you were hiring two new sales reps, their salaries must be factored in. Below is an example of a Pro-forma Income Statement: Assume your projected sales revenue for one year for a new OB service to be $200,000. You calculate this by taking your projected revenue per visit from your Breakeven Analysis (we used $200 per visit) x the number of visits you forecast from your projected market calculations in Part 1 of the assessment (in this example, it might be 1,000 visits). Next calculate the cost of sales. This is the Fixed Cost plus Total Variable Costs for 1,000 visits. Your total costs would be 1,000 x $100 variable cost per visit = $100,00 + the one-time construction fixed cost of $50,000 = $150,000 total costs (which is cost of sales). Your Gross Profit would be $200,000 – $150,000 = $50,000. Subtract your Marketing Cost (which we estimate at 7% x $200,000 = $14,000). This provides you with your Net Income ($50,000 – $14,000 = $36,000). This represents the total amount of profits you will generate in your first year. Finally, calculate the Net Profit Margin. ($36,000 / $200,000 = .18 or 18%). You will need to analyze if the total net income and total net profit margin fits within the objectives of your organization. Use this form to create your Pro Forma Income Statement. Enter the projected numbers, following the formulas beneath the line item. Write projected year against each project detail: • • • • • • Projected Sales Revenue: Cost of Sales (Fixed + Variable Expenses): Gross Profit (Projected Sales Revenue – Cost of Sales): Marketing Expenses (7% of Sales Revenue): Net Income (Projected Profit) (Gross Profit – Total Marketing Expenses): Net Profit Margin % (Does this amount of profit make sense?) (Net Income/Sales Revenue): Copyright 2021 by University of Phoenix. All rights reserved.

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