HACM9102 - Financial Management and Economics in Health Care

Assignment Task

Overview

Using the provided financial and operational data, give a presentation (slides and audio) outlining your calculations and advice regarding break-even analysis and a capital investment decision, to the Executive Leadership Team of your health service organisation.

Part 1: Break-even Analysis

1. What is SPH’s current contribution margin and current contribution margin ratio?

2. What is SPH’s breakeven point – represented in number of patients and revenue? SPH is tendering for a government contract to provide health care services to an additional 400 patients (the government will pay SPH a fixed fee to provide services for the 400 patients). The current occupancy rate is such that SPH’s overheads will stay the same regardless of whether SPH is successful with its tender. It is expected that the additional patients will cost the same to treat as the current patients.

3. If SPH is successful with its tender what extra costs will be involved? Prepare a schedule showing the extra costs involved in providing services to these 400 patients.

4. What is the minimum tender bid for SPH to break-even on the tender? Note: Consider SPH’s financial position based on the initial 900 patients – this will influence your tender bid for the 400 patients.

5. If SPH bid $427,000 for this government contract, what impact would the tender have on the hospital’s overall profitability?

6. In considering the tender for this government contact, what other factors might the SPH take into account? 

Part 2: Capital Investment Decisions

1. Evaluate the relative merits of Machine A and Machine B using:

• The cumulative cash flow

• The payback period (PP)

• Net present value (NPV)

• Internal rate of return (IRR)

2. Which machine is the better investment? Explain your answer.

3. What are opportunity costs and how are they important in capital investment decisions?

4. Why are cash flows rather than profit flows used for IRR, NPV and PP?

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