Breakeven Analysis for Senior Care

Assume that you have become the assistant director of Senior Care, a nonprofit agency, which provides several home health services nursing, physical therapy, and social work to elderly patients. As the assistant director, you are responsible for both the preparation of the budget and an annual financial report provided to the Board of Directors.

The major source of funding in the past has been the state Department of Health and Social Services (DHSS), which manages several federally funded programs. DHSS has recently changed its method of reimbursement. In the past, DHSS has allowed all services to be pooled in calculating unit costs. The result has been some cross-subsidization across types of services. This practice has been changed, and the maximum rate that an agency can receive is set separately for each type of service.

The previous assistant director had little finance background and maintained the bare minimum records to prepare a budget and reimbursement request. You have been hired to develop a more flexible cost accounting and budgeting system and to help the agency adapt to this new funding environment. You have pulled together all the information on last year's operation, which is reported in Table 1. Using this information, answer the following questions.

What are the different mission centers of Senior Care? (1 point)

Senior Care maintains the data for personnel and medical supplies for each unit, but the cost of different contractor services and overhead expenses are available for the entire organization, i.e., they are the indirect costs. Convert these indirect costs to direct costs using Number of Visits as the cost allocation factor for Contract Services, and Personnel Salary as the cost allocation factor for Overheads. (2 points)

Assume that the cost of medical supplies is the only variable cost that changes depending on the number of patient visits, and the remaining costs are fixed in the short run (since personnel costs are step fixed costs). During the recent revisions, the DHSS has set separate reimbursement rates for each type of service that are listed in the table. Calculate the breakeven number of patient visits for each mission center. (3 points)

Notes:

(a) Use state reimbursement rate for each type of service as the price in the calculations.

(b) Medical supplies are the only variable cost, but you have to calculate per visit variable cost