Problem 1. Break-Even Analysis
The Beach Street office of Getwell Clinics specializes in the treatment of three types of patients: DRG M, DRG J, and DRG P. The operating statistics for patient care of these three DRGs for last year are shown below. They include patient volume proportions, average charges, average variable costs, and the amount of specific fixed costs assignable to each DRG. In addition, the satellite office had joint fixed costs last year of $240,000.
Getwell Clinics Operating Statistics
|
DRG
|
Proportion
|
Charge
|
Variable Cost
|
Fixed Cost
|
|
M
|
50%
|
$1,700
|
$1,000
|
$500,000
|
|
J
|
30%
|
2,600
|
1,200
|
280,000
|
|
P
|
20%
|
900
|
600
|
110,000
|
|
|
|
|
Joint Fixed Costs
|
830,000
|
|
|
100%
|
|
|
$1,720,000
|
Doctor Barkley, newly appointed director of the satellite office, has requested that you determine the breakeven points for each DRG. Dr. Barkley also wants to know which DRG would be the most profitable to promote in growing the practice. A recent time study showed that procedures involved in each DRG took the following time: DRG M, 2 hours; DRG J, 5 hours; and DRG P, 1 hour.
Prepare a formal and comprehensive response to Dr. Barkley that demonstrates understanding of the Week Three objectives.
o Explain the relevance of DRG analysis as a tool that drives costs and affects management decisions in healthcare.
o Calculate the breakeven points, in numbers of treatments, for each type of DRG, using the weighted average contribution margin approach.
o Propose your recommendations that answer the following questions:
- Which DRG must be promoted in an advertising program if the office has excess capacity? Explain why.
- Which DRG must be promoted if the office is almost at maximum capacity in terms of available hours? Explain why.
- What rationale may be used to support the use of DRGs as an approach to allocating costs?
The Weeks objectives:
Analyze the cost-volume-profit relationships to predict effects of changes in sales or costs, including the breakeven sales volume.
Compare and contrast the different methods of measuring cost functions in the health care industry.
Explain how cost accounting systems are used in the health care industry to determine the cost of a product, service, customer, or other cost objective.