Word Count : 1500 - 2000 words
This assignment provides an opportunity to apply the theory and financial management principles relating to break-even analysis, capital investment decisions and activity-based funding models.
Part A – Break-even Analysis
Marigold Clinic is a newly established Physiotherapy clinic. The owner, Mr Matthews, has drawn up an initial business model for the clinic. According to the model:
• He plans to offer 3,000 occasions of service (OOS) in year 2023 to the community.
• The service fee he charges per OOS is $85.
• The variable cost per OOS is $40 and mainly consists of the independent contractor rates paid to the Physiotherapist he hired.
• The fixed costs for the clinic are:
o Rent $25,000
o Utilities $10,000
o Maintenance $12,000
o Administration $15,000
o Marketing $ 5,000
Mr Matthews has hired you as a consultant to verify his business model. Using the break-even analysis method, complete the following steps:
1. Compute the contribution margin per OOS.
2. Compute the break-even point in terms of OOS and in terms of dollars.
3. Develop a graph that shows the break-even point.
4. Advise Mr Matthews whether his business model is viable.
After the model above was validated, the government unexpectedly introduced a new policy, where a minimum independent contractor rate was established for Physiotherapists. As a consequence of this recent ruling, the variable cost per OOS for Marigold Clinic was anticipated to increase to $55. You were asked to re-evaluate the model by completing the following steps:
5. Conduct a revised break-even analysis to reflect the change.
6. Develop a graph that shows the new break-even point and overlay it with your graph from point 3 above.
7. Based on the new ruling, advise Mr Matthews whether he should still proceed with the service offerings in 2023. Explain your reasoning.
Mr Matthews is concerned about future abrupt policy changes that may impact the viability of his business.
He asked you to assist him on the following tasks:
8. Compute the maximum variable cost per OOS his business can absorb before it starts making a loss.
9. Advise him on how he can ensure the sustainability of his business if the maximum variable cost is reached,
or if other events cause a dramatic increase in his fixed costs. (Please note: this is an open-ended question.
You should ensure your answer is extensive and takes into account the various financial and non-financial metrics available).
Part B – Capital Investment Decisions
Sacred Mind Hospital is considering the purchase of new medical equipment.
The decision has come down to choosing between Machine A and Machine B.
Machine A has a cost of $120,000 and has an expected economic life of five years, after which it has no scrap value. The cash flowed income for the next five years from this machine is:
• $45,000
• $44,500
• $40,000
• $39,000
• -$5,000
Machine B has an initial cash outlay of $110,000 with an economic life of five years and no scrap value. The cash flowed income from this machine is expected to be:
• -$8,000
• $35,000
• $45,000
• $62,000
• $65,000
Sacred Mind Hospital prefers projects that pay for themselves within three years. The discount rate is 10%.
Sacred Mind Hospital also requires an Internal Rate of Return of at least 10% before a capital investment can proceed.
1. Evaluate the relative merits of these machines using:
1.1 The actual (or nominal) cash flow
1.2 The payback period (PP)
1.3 Net present value (NPV)
1.4 Internal rate of return (IRR)
2. Which machine is the better investment? Explain your answer and your preferred method of evaluating the investment merits of these machines.
3. A late quotation for a machine from another supplier (Machine C) has come through and needs to be
evaluated. The following parameters were derived from the quotation:
Machine C has an initial cash outlay of $130,000 with an economic life of six years and no scrap value. The cash flowed income from this machine is expected to be:
• -$10,000
• $25,000
• $35,000
• $45,000
• $60,000
• $50,000
How does Machine C compare with Machines A and B in terms of investment value? Explain your answer.
Part C – Activity Based Funding
This part contains open-ended questions on the concept of Activity Based Funding. Formal sentence structure,
grammar and appropriate referencing are expected.
1. Describe activity-based funding within the context of the Australian health sector.
2. What is the role of the Independent Hospital Pricing Authority with regards to Activity Based Funding?
3. Is it reasonable to assume that the (average) National Efficient Price should apply equally to all states within Australia? Outline the assumptions which support your answer.
4. Activity Based Funding relies heavily on the average length of stay metric. Describe the advantages and disadvantages of using the average length of stay for funding purposes