Financial Analysis ABC Hospital

Scenario 3: Montgomery Home and Community-Based Services

Montgomery Home and Community-Based Services is considering a major expansion that will enable it to attract a different clientele to its organization. Currently, they serve only 34% of the frail elderly seniors and persons with disabilities in a three county area, with the majority of the residents working for the federal and state government. Montgomery relies 100% on local government funding to provide in home support and homemaker service to their clients. Their new chief executive officer (CEO) would like the organization to expand its revenue stream by investing in a senior multipurpose center serving healthy seniors by offering them arts and crafts and health and wellness programs. The center will also contain an Internet café offering nutritious breakfast and lunch options.

The CEO has commissioned a needs assessment, and the study’s results reveal that there are only 15 retired seniors who would be willing to pay the monthly fees to access the center. Further results reveal that there are approximately 120 seniors who will be retiring from the government in three years who would be willing to become members at the center.

The proposed costs to operate this new facility are as follows:

Monthly Fixed Costs

· Utilities: $590

· Health/Wellness Staff: $2,500

· Arts/Crafts Staff: $2,000

· Supplies: $800

· Fitness Equipment Maintenance Contract: $200

Variable Costs

· Monthly Membership Fee: $105

· Monthly Lunch Cost: $25

· Monthly Breakfast Cost: $15

Based on the information above, the initial investment to establish the center is $317,880. The organization anticipates that it will generate $25,700 of revenues in the first year, $40,000 in the second year, $78,000 in the third year, $225,000 in the fourth year, and $310,000 in the fifth year.

The Assignment

The CEO has presented her proposal and financial information to the board of directors, and they have advised her that they are in full support of her strategy if the program is a benefit to the community and if the organization can recoup its investment in three years. Based on the information presented in the scenario, calculate the two analyses below and explain their implications.

1. Perform the break-even analysis to determine how many seniors would need to have full monthly membership and pay for breakfast and lunch for Montgomery Home and Community-Based Services to cover its monthly expenses.

Break-even volume = Total fixed costs / (Average charge per client – Average variable cost per client)

2. Calculate the payback period to determine how long it will take for the organization to recover its initial investment of establishing the senior multipurpose center.

Payback period = A + (B/C)

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