In December, Joseph Blanchard became the controller of Carls- bad Home Care (CHC). After 10 years in the accounting depart- ment of a consumer products firm, Mr. Blanchard had decided to move into the nonprofit field where he felt his expertise would be needed. CHC, a small agency in Southern New Mexico, offered him that opportunity. Before Mr. Blanchard accepted the position of controller, Ms. Louise Tucker, the director of the agency, briefed him on the agency's financial position. Like many home care agencies, CHC had become affiliated with a large health maintenance organization (HMO). The HMO paid a fixed fee of $110 to CHC for each home visit. Ms. Tucker was concerned be- cause CHC's per-visit costs exceeded that amount, she had hired Mr. Blanchard with the hope that he could resolve this problem. CHC's average cost per visit calculation is contained in Exhibit 1 BACKGROUND CHC's goal was to provide home health visits to elderly and disa- bled residents of Carlsbad and neighboring towns. Several years ago, in response to community need, it had expanded its services to include physical therapy and social service visits. Because an- other organization in town, The Canyon Home Service, provided home health aide care, CHC did not offer aide services. CHC cur- rently had a staff of 13. Two registered nurses, two physical ther- apists, two social workers, and one psychologist were responsi- ble for the home health visits. The administration con- sisted of a director, an assistant director, the newly appointed controller, and a support staff of three. The skilled nursing care visits were han- dled by the iwo registered nurses. The two physical therapists worked exclusively on patient visits. The social workers, in con- sultation with the psychologist (who made no visits), provided all the social service visits. The two registered nurses who handled all nursing visits could provide as many as seven visits a day each. However, because the case visits varied significantly in time, effort, and location, the nurses averaged only 5.5 visits per day. The physical therapists averaged 3.3 visits per day, al- though Ms. Tucker thought their capacity could be increased by at least 33 percent if they had the demand. The social workers averagei 4.5 visits a day, but Ms. Tucker thought these could be in- creased to about 5.5 a day. The CHC staff worked an average of 240 days a year. DATA In his first few weeks, Mr. Blanchard reviewed CHC's financial statements, employee service sheets, and other working papers to become familiar with the agency's financial status and planning needs. He realized the agency had been operating without any cost goals. After a cursory review of past records, he decided that his first priority was to ensure that revenue met costs. Examining CHC's Expense Record, shown in Exhibit 1, Mr. Blanchard deter- mined that the agency had two types of costs: those that changed according to the number of visits provided and those that were unchanged, regardless of volume. He reasoned that at their breakeven point, CHC's revenue of $110 per visit would equal the total cost of the expenses generated by each visit plus the fixed expenses. Mr. Blanchard reviewed each item on the Ex- pense Record to determine which type of cost it was. He thought the medically related salaries and the medical and nursing sup- plies were items that varied directly with the number of visits. When he discussed his analysis with Ms. Tucker, she suggested that staff automobile allowance varied with the number of visits because it referred to mileage incurred by the medical staff in making home visits. "Terrific," thought Mr. Blanchard. "Now I can calculate a variable cost per visit and in no time I'll know the breakeven point. I can "Terrific," thought Mr. Blanchard. "Now I can calculate a variable cost per visit and in no time I'll know the breakeven point. I can show them their costs and revenues, and where we'll have to operate to keep this agency in business." Assignment 1. Identify the fixed and variable costs 2. What is the breakeven point? 3. What assumptions were necessary in answering questions 1 and 2? 1.Salaries.. Director, assistant director, controller... Nurses (2) Psychologist (1). Social workers (2)... Physical therapists (2). Support staff (3) ... CARLSBAD HOME CARE Exhibit 1 2. Transportation costs. Automobile operation and insurance. Automobile allowance for staff. 3. Purchased services... 4. Medical and nursing supplies. 5. Space occupancy costs.... 6. Office costs (telephone, postage, stationery) 7. Other general costs (depreciation, insurance, legal) Total cost... Numbers of visits Average cost per visit $739,186 6,384 $115.79 Details $165140 $105920 $ 56000 $77000 $ 90334 $ 73600 $ 16000 $ 40000 total $567994 56000 $ 4700 $ 14800 $34660 $ 25312 $ 35720