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ASSIGNMENT INSTRUCTIONS:
1. Break-Even Analysis
Sure Care Health Maintenance Organization is seeking a managed care contract with a local manufacturing plant.
Sure Care estimates that the cost of providing preventative and curative care for the 300 employees and their families will be $36,000 per month.
The manufacturing company offered Sure Care a premium bid of $200 per employee per month.
If Sure Care accepts this bid and contracts with the manufacturing firm, will Sure Care earn a profit or loss for the year? How much?
Describe the steps you used to solve this question.
2. Minimizing Errors in Projections
Break-even analysis utilizes both current and projected figures. In a rapidly changing economy, there are many individuals who are finding that their initial break-even analyses were incorrect.
In your opinion, what could be done to minimize errors in projections?
HOW TO WORK ON THIS ASSIGNMENT (EXAMPLE ESSAY / DRAFT)
Essay 1: Break-Even Analysis
In this scenario, Sure Care Health Maintenance Organization is considering a managed care contract with a local manufacturing plant. The company estimates that providing care for the 300 employees and their families will cost $36,000 per month. The manufacturing plant has offered a premium bid of $200 per employee per month. The question is whether Sure Care will earn a profit or loss for the year if they accept the bid.
To determine the break-even point, we need to calculate the total revenue and the total cost. Total revenue can be calculated by multiplying the number of employees by the bid price per employee per month and by the number of months in a year. In this case, the total revenue would be $200 x 300 x 12 = $720,000.
The total cost includes both fixed costs and variable costs. Fixed costs are those that remain constant regardless of the number of employees, such as rent and salaries. In this scenario, the only fixed cost is the $36,000 monthly cost for providing care. Variable costs are those that change with the number of employees, such as medical supplies and staff time. In this scenario, the variable costs are included in the $200 per employee per month bid.
To calculate the break-even point, we need to determine the number of employees that would generate enough revenue to cover the total cost. The break-even point can be calculated as:
Break-even point = Total fixed cost / (Price per unit – Variable cost per unit)
In this scenario, the total fixed cost is $36,000 per month or $432,000 per year. The price per unit is $200 per employee per month or $2,400 per year. The variable cost per unit is zero, as it is included in the price per employee per month bid.
Using the formula, we can calculate the break-even point as:
Break-even point = $432,000 / ($2,400 – $0) = 180 employees
This means that if the manufacturing plant has less than 180 employees, Sure Care will incur a loss. If they have more than 180 employees, Sure Care will earn a profit.
In this scenario, with 300 employees, Sure Care will earn a profit of:
Profit = Total revenue – Total cost Profit = $720,000 – ($36,000 x 12) = $288,000
Therefore, if Sure Care accepts the bid and contracts with the manufacturing firm, they will earn a profit of $288,000 for the year.
Essay 2: Minimizing Errors in Projections
Break-even analysis is a useful tool for businesses to determine the minimum level of sales needed to cover their costs. However, in a rapidly changing economy, projections can often be incorrect, leading to costly mistakes.
One way to minimize errors in projections is to conduct regular reviews and updates. As economic conditions change, projections need to be updated to reflect the current environment. This can include changes in market conditions, customer preferences, or regulatory requirements. By conducting regular reviews and updates, businesses can ensure that their projections are accurate and relevant.
Another way to minimize errors is to use multiple scenarios. Instead of relying on a single projection, businesses can develop multiple scenarios that reflect different outcomes. This can include best-case, worst-case, and most-likely scenarios. By considering different scenarios, businesses can prepare for a range of outcomes and reduce the risk of being caught off guard.
A third way to minimize errors is to involve multiple stakeholders in the projection process. By involving different departments, such as finance, marketing, and operations, businesses can gain a more comprehensive view of the market and the business. This can help to identify potential risks and opportunities and ensure that projections are realistic and achievable.
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