Breakeven Point Is a Managerial Accounting Term

Breakeven point is a managerial accounting term that relates to the point at which the fixed costs are covered (no author, 2013). The breakeven point can be expressed as a dollar value of revenue, or it can be expressed as a number of units (in a simple one-unit firm). There is a breakeven point for services as well as for goods. For a health care institution, the breakeven point should be expressed in dollar value of revenue. The text uses the per unit method, but no health care institution only performs one kind of service. Such an approach is more appropriate for determining the pricing of an individual service, but only then when the demand for that service is known, which is often not the case in health care. The text defines the breakeven point as an understanding of the relationship between cost, volume and profit.

Calculating the breakeven point is a relatively simple process on paper. The first step is to understand the company's cost structure. When the fixed costs are known, the company then knows that in order to turn a profit, it needs to have a contribution that is higher than the fixed cost level. The contribution is the revenue less the variable costs.

Knowing the breakeven point is a valuable tool for management. The managers can identify a target revenue, and worth within the confines of the health care payment scheme. As the text points out, the multi-payer model necessitates an adaptation in the breakeven point method, since the company has widely fluctuating bargaining power for pricing its services, depending on the payer. A three-payer model is outlined to help explain how a more complex version of breakeven analysis might be used in the health care industry. A practitioner is likely to refine the model further, estimating the payer percentages for different types of procedures. By examining the fixed costs of the organization and then evaluating the fairly complex nature of demand and pricing in the health care context, a company has the ability to understand where its revenues are likely to fall in relation to fixed costs. This allows management to either seek more revenue streams or to reduce fixed costs where such reductions will not affect the firm's ability to meet demand.

Student 2: Cleverley, Jones and Cleverley (2011) note that "the primary value of break-even analysis is its ability to quantify the relationships among the previous factors and profit," the previous factors being rates, volume, variable cost, fixed cost, payer mix and bad debts. All of these factors are built into multipayer break-even analysis model that the authors present. It is worth noting that the break-even analysis model reflects the amount of business that the facility needs to do in order to cover its costs. The first step is to calculate the contribution margin, which is the revenues less the variable costs. As the authors note, this is the most complex step in health care, because of the different payer mix. Their model is essentially an adaptation of the basic model where the firm is seeking to cover its fixed costs.