Break-even analysis revisited: The need for adjust for profitability, the collection rate and autonomous income

Robert W. Broyles, Lutchmie Narine, Amir Khaliq

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

This paper modifies traditional break-even analysis and develops a model that reflects the influence of variation in payer mix, the collection rate, profitability and autonomous income on the desired volume alternative. The augmented model indicates that a failure to adjust for uncollectibles and the net surplus results in a systematic understatement of the desired volume alternative. Conversely, a failure to adjust for autonomous income derived from the operation of cafeterias, gift shops or an organization's investment in marketable securities produces an overstatement of the desired volume. In addition, this paper uses Microsoft® Excel to develop a spreadsheet that constructs a pro forma income statement, expressed in terms of the contribution margin. The spreadsheet also relies on the percentage of sales or revenue approach to prepare a balance sheet from which indicators of fiscal performance are calculated. Hence, the analysis enables the organization to perform a sensitivity analysis of potential changes in the desired volume, the operating margin, the current ratio, the debt: equity ratio and the amount of cash derived from operations that are associated with expected variation in payer mix, the collection rate, grouped by payer, the net surplus and autonomous income.

Original languageEnglish (US)
Pages (from-to)194-202
Number of pages9
JournalHealth Services Management Research
Volume16
Issue number3
DOIs
StatePublished - Aug 1 2003
Externally publishedYes

ASJC Scopus subject areas

  • Health Policy

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