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Break-Even Analysis
You want to update your car with a navigation system. Adding this feature requires a flat fee of $500, and the service provider requires monthly charges of $20. In your business, as the owner, you estimate that this device can save time and money, about $35 per month. You plan to keep the car for another 3 years.
1. Calculate the break-even point for the device in months.
2. Based on your calculation, would you have the system installed in your car? Why, or why not?
3. Discuss with your fellow students how and why similar break-even analysis may be applicable in health care organizations.
Example Answer:
The navigation system costs $500 for initial installation and there will be monthly charges of $20 with a monthly savings of $35. We plan to keep the car for 36 months so we need to subtract $20 from $35 and that gives us $15. We must subtract the $20 from the savings of $35 because this is the monthly expense. After we get the remaining $15, we need to divide $500 (the initial cost) by $15. That will equal a little over 33. The number 33 indicates the number of months that it will take to break-even with this purchase. That means there will be about two months of gain by installing the navigation system.
Based on my calculations, I would not install the navigation system. I do not think it is worth it to have a net gain of only two months. However, I wouldn’t disagree with someone if they said they do think it is worth it. It is not a loss of profits, and you can most likely ask a higher price for the vehicle when it comes time to sell. To me, I personally do not feel as though it is worth it, but that is mainly because I do not like to spend money; especially with a small net gain.
This system could be used for numerous items in health care. About ten years ago a dental office made the switch to using digital radiographs. This was a huge investment to make due to needing all new equipment. They were currently using the software it needed to take the radiographs, so they did not need to spend money on that. However, they needed to buy three intra-oral sensors. Each sensor is about $10,000 each. On top of the sensors, they wanted a digital panoramic machine as well, and that costs roughly $150,000. Most dental offices have been using digital radiographs for years and they are more diagnostic, less radiation is used, and they are reusable. So, by getting these we could eliminate our processing machine that was used, the chemicals it takes to fill up the machine, no longer buy films for each patient, and benefit the patient from a health standpoint. The dental office could use the break-even analysis to see if it is worth it to make such a large purchase. They could determine how many years it would take to break even if they made this purchase.
