Case 2 Flex budget analysis The CFO of a Summit County Regional hospital has asked you as a hospital budget analyst to review the financials of a small substance counseling and services program. Summit County is a rural county, on the outskirts of a medium sized Ohio city. The program, in its 5th year of existence, has never broken even. The program currently charges $78 per 30 minute patient-visit. To prepare for the 2018 annual budget for this program, the 2017 annual results are shown:

The following program cost facts are as follows: 1. Materials and wages/salaries are variable based on number of visits. 2. 92% of the admin/general expenses are fixed; the balance is variable based on number of visits. 3. Variable overhead was equal to 22% of labor costs, with the balance fixed. 4. No change in cost behavior is expected, except it is expected that in 2017 variable overhead will increase to 25% of labor costs. 5. The CFO is under pressure to raise the hourly wages of hospital staff, and projects a 3% across the board wage increase for 2018.

The manager of the program, under pressure to improve the bottom line performance of this program, has predicted that visits in 2018 will increase to an average of 1500 visits per month. The CFO is requiring that the program at a minimum will break even in 2018. She has asked for an analysis of the proposed 2018 budget and an estimate on the probability of the program reaching his required goal. She has also requested a recommendation on the continuance of this service, and rationale for the recommendation. In the prepared analysis, the CFO is asking for:

1. Prepare a contribution margin (CM) income statement for 2017. What is the CM% and the number of break-even visits for 2017? 2. The cost function for the program, based on the 2017 actual budget figures and 2018 expected cost changes listed above. Hint: this is the linear cost function based on variable cost per patient visit and annual fixed. 3. A prepared contribution margin statement for 2018 using the program directors estimate of patient visits for 2018. 4. Prepare a CM flex-budget for 2018 for the following volume of patient visits: a. No change in patient visits (use 2017 patient visits) b. 17,500 c. 18,500 5. The CFO has asked you to provide a recommendation as to whether to continue this program, or not. Provide a 400 to 500 word memo to include: a. Your recommendation and why? b. Discuss and support all relevant factors relating to your recommendation. c. Besides the financial aspects of this analysis, what other relevant business-related factors and/or considerations will you present to the CFO for consideration?

Revenues: $78 16,800 patient-visits $1,310,400 Expenses: Wages/salaries, clinical Materials Wages/salaries, support staff Overhead Total direct cost of services Admin/general expenses Total expenses $215,000 $115,750 $156,500 $675,200 $1,162,450 $196,250 $1,358,700 Net operating profit/loss ($48,300)