Question

Orange County Community Health Plan must be able to generate certain data sets in order to compute the break-even point for the proposed new satellite facility. Some of these data elements can be obtained from existing information systems, and others must be estimated or obtained through surveys. The available data include the following:

a. Data from existing information systems: Total variable costs $180,000 per 100 enrollees or $1,800 per enrollee per year

b. Data obtained from estimates: Total fixed costs $650,000 per year

c. Data obtained from estimates: Revenue per enrollee based upon preliminary research is $1,950 per enrollee per year

i) Estimate the number of enrollees required for the plan to break-even.

ii) Calculate the profit or loss if the health plan only attracted 1550 enrollees.

Answer 1

i.

The Break-even point is the point where expenses are equal to sales. At break even point there is no profit and no loss.

Let us consider we require X number enrollees for breaking even.

At the break-even point, we'd have

Revenue = Expenses

Revenue per enrollees * No on enrollees = Fixed cost + variable cost

Revenue per enrollees * No on enrollees = Fixed cost + variable cost per enrollees*No on enrollees

1950*X = 650,000 + 1800*X

X = 650,000/150

X = 4333.33

X = 4334 (Nearest higher integer)

We need 4334 enrollees for the plan to break-even.

ii.

Revenue at 1550 enrollees = Revenue per enrollees * No on enrollees = 1550*1950 = 3022500

Cost at 1550 enrollees = Fixed cost + variable cost per enrollees*No on enrollees

= 650000 + 1800*1550 = 2790000 + 650000 = 3440000

Costs are more than revenue, we have incurred a loss.

Loss = Cost - Revenue = 344000-3022500 = 417500

We had a loss of $ 417,500