Question

The North Bay Mental Health Clinic operates two different programs. The outpatient clinic's clients come from the neighboring community. Clients are billed for each visit according to their ability to pay; on the average, clients pay $25 per visit. Counselors in the outpatient clinic receive $15 per patient visit on a contract basis. Variable costs of record keeping average $1 per patient-visit. The fixed costs-- composed of rent, insurance, di-rector's salary, and office personnel- - -total $4,000 per month. In a typical month the clinic has 450 client-visits.

The inpatient clinic operates a residential home for homeless adolescents under a state contract. The state pays North Bay $1,000 per month per approved resident. In a typical month the home has 20 residents. The clinic's total staff salaries, all of which are fixed, total $14,500 per month. The clinic's rent, which includes all operating costs of the facility, is $3,000 per month. The clinic also incurs $100 per month per resident for food purchases.

      REQUIRED:

A. Prepare a separate contribution margin income statement for each program.

B. Determine the break -even point in dollars for each program.

C. Comment on the cost structures of the two programs.

Answer 1

A.

North Bay Mental Health Clinic
Contribution Margin Income Statement
Outpatient Clinic
Revenue	11250
Variable expenses	7200
Contribution margin	4050
Fixed expense	4000
Net income $	50

North Bay Mental Health Clinic
Contribution Margin Income Statement
Inpatient Clinic
Revenue	20000
Variable expenses	2000
Contribution margin	18000
Fixed expense	17500
Net income $	500

B. Break-even point in dollars = Fixed expenses/Contribution margin ratio

Outpatient Clinic:

Contribution margin ratio = Contribution margin/Revenue = $4050/$11250 = 36%

Break-even point = $4000/36% = $11111

Inpatient Clinic:

Contribution margin ratio = Contribution margin/Revenue = $18000/$20000 = 90%

Break-even point = $17500/90% = $19444

Note: Break-even point is rounded off to the nearest whole dollar amount.

C. The cost structures of the two programs are very different from one another. The outpatient clinic has higher variable costs and lower fixed costs as compared to the inpatient clinic which has low variable costs and high fixed costs. Due to the higher fixed costs, the break-even point of the inpatient clinic is much higher than that of the outpatient clinic program.