[Expert Solution]: THE CRIMSON PRESS CURRICULUM CENTER…

THE CRIMSON PRESS CURRICULUM CENTER Springfield Visiting Nurse Association In January, Donald Hoover, field manager of Springfield Visiting Nurse Association was deciding whether to employ full time nurses or to subcontract for nursing services on a per-visit basis from a local agency. Inasmuch as Springfield was experiencing some financial difficulties, Mr. Hoover knew that this decision could have some important consequences for Springfield’s financial viability. BACKGROUND Springfield VNA was founded some 30 years ago, and had enjoyed remarkable growth. Its revenues had in creased tenfold during the last 10 years, and its workforce had quadrupled. With this growth in activity, howev er, Springfield had outpaced its management capabilities. Last year, it had lost money, due in large part to a lack of good cost control. It was because of these financial difficulties that Mr. Hoover had been hired. He had begun work shortly af ter receiving his MBA from a local university. While an undergraduate student, he had worked as an emergency medical technician during the school year, and had been employed by a home heath agency during the summers, where he had served in a variety of capacities. He thus was quite familiar with the clinical side of the business. This familiarity, coupled with his MBA skills, was just what Springfield’s board felt it needed to get the VNA’s financial house in order. Mr. Hoover had been hired with the explicit mandate to put the agency on a solid finan cial footing. Like most VNAs, Springfield was organized into several divisions, one of which was the nursing division. Other divisions included home health aides, physical therapy, and social services. The home health aides assist ed clients with daily living activities such as bathing and eating. Physical therapy assisted clients with recover ing their normal physical functioning, such as walking. The social service staff did counseling with those pa tients who were having a difficult time adjusting to a homebound life. The nursing division took care of the clin ical needs of Springfield’s patients (such as changing dressings on wounds or giving injections). The division was expected to make a sizable contribution to the agency’s overhead costs. During the past two years, however, the division’s contribution had fallen considerably, and had actually been negative during one quarter. REVENUE AND EXPENSES The fixed costs associated with Springfield’s nursing division were estimated to be $9,000 a month for its share of rent and other overhead expenses. The variable cost of medical and other supplies was $30 per visit. Mr. Hoover knew the program could earn revenue of $200 per visit per nurse. Nurses averaged five visits a day. In terms of personnel, Mr. Hoover saw two options. The first was to use full time nurses to meet the agency’s demand each month. Each nurse would be expected to make visits twenty days per month (the remain ing work days would be used for administrative activities, such as meetings). A nurse’s monthly salary would be $5,500 (regardless of the number of visits actually made during the month). The second option was to contract for nursing services, as needed, from the local agency. The labor rate (i.e., not including supplies) was $350 per day, which Mr. Hoover found to be competitive with other similar agencies in the area. As was customary in the industry, partial days would be billed at the full rate. As the last step in his analysis, Mr. Hoover gathered some information on the seasonality of the demand for the division’s services. He found that, over the past two years, the average nursing days needed per month dur ing the first quarter of the year (January-March) was 61. During the second quarter, the average was 45. It was 30 and 55, respectively, during the last two quarters of the year. With this information on revenue, expenses, and seasonal demand, Mr. Hoover felt he could calculate a breakeven point for each option, and use this as a basis for making his decision. Questions 1. Calculate the breakeven point for each option. Why do these breakeven volumes differ? 2. Which option is preferable? Why? 3. Assuming the quarterly data represent the pattern for the upcoming year, how should Mr. Hoover staff the division so as to maximize the nursing division’s contribution to the VNA’s surplus? 4. What other factors or options should Mr. Hoover consider?