NURS 523 Week 3 Financial Exercise 1 on Cost Behavior and Break-Even Analysis Example

Financial Exercise 1: Cost Behavior, Contribution Margin and the Break-Even Volume for a Nurse-Led Outpatient Wound Clinic

Question 1: Classify the Clinic's Costs by Behavior

Jones et al. (2019) define fixed costs as costs that do not change in total as volume changes within a relevant range, variable costs as costs that change in total in direct proportion to volume, and mixed costs as costs with both a fixed and a variable part. The clinic is a nurse practitioner-led outpatient wound clinic open 22 days a month, staffed by one nurse practitioner and one certified wound care nurse. Its monthly costs are classified below.

Total fixed costs are therefore $24,500 per month, and variable costs are $66 per visit. The salaries are fixed even though they are labor costs, because the two clinicians are paid the same whether they see 250 or 400 patients a month. They would become step-fixed if volume rose high enough to require a second nurse.

Question 2: Calculate the Contribution Margin

The contribution margin is the amount each unit of service contributes toward covering fixed costs after its own variable costs are paid (Jones et al., 2019). The clinic's average payment per visit, across its payer mix, is $142.

Contribution margin per visit = average payment per visit minus variable cost per visit = $142 minus $66 = $76.

Every visit leaves $76 to help pay the clinic's salaries, space and equipment, and only after those fixed costs are covered does any visit add to a surplus.

Question 3: Calculate the Break-Even Volume

Break-even volume is the number of units at which total revenue equals total cost, found by dividing total fixed costs by the contribution margin per unit (Jones et al., 2019).

Break-even visits per month = $24,500 divided by $76 = 322.4, rounded up to 323 visits.

Rounding up matters, because at 322 visits the clinic would still be a few dollars short. Spread over 22 clinic days, 323 visits means about 14.7 visits a day, or roughly 15. The clinic's two clinicians can see about 20 patients a day between them, a capacity of 440 visits a month, so the break-even volume is about 73% of capacity. The clinic currently sees 280 visits a month, which is 43 visits short of break-even.

Monthly result at current volume = (280 times $76) minus $24,500 = $21,280 minus $24,500 = a loss of $3,220.

Question 4: Show How Cost per Visit Changes With Volume

Because fixed costs are spread across more visits as volume grows, the full cost of each visit falls even though the variable cost per visit stays at $66.

At the current 280 visits, each visit costs $153.50 to deliver but brings in $142, which is why the clinic loses money. At 400 visits, each visit costs $127.25, leaving about $14.75 per visit as surplus. This pattern explains why administrators often push outpatient programs to grow toward capacity, and why a program can look expensive in its first year simply because its volume is low. Hospitals often express the same idea as a cost per unit of time for expensive fixed resources; in a study of hip replacement surgery, for example, Bendich et al. (2025) priced operating room time at $46 per minute, so every minute of idle or inefficient time carried a visible cost. The wound clinic's equivalent is an empty appointment slot, which costs the clinic its share of fixed salaries and space whether or not a patient fills it.

Question 5: Test the Effect of a 5% Payment Cut

A sensitivity analysis asks how results change when one assumption changes (Jones et al., 2019). If the average payment per visit fell 5%, from $142 to $134.90, the contribution margin would fall to $134.90 minus $66, or $68.90. The new break-even volume would be $24,500 divided by $68.90, or 355.6, rounded up to 356 visits a month, about 16.2 visits a day. A 5% payment cut therefore raises the break-even volume by 33 visits, or about 10%. Small changes in payment have a large effect on break-even volume when the contribution margin is narrow, which is why the clinic should monitor its payer mix closely.

Question 6: What Should the Nurse Manager Do With These Results?

The nurse manager should treat the analysis as a guide to decisions rather than a verdict on the clinic. Three actions follow. First, the manager can work with referring physicians and the hospital's inpatient wound team to raise volume by about 45 visits a month, for example by scheduling follow-up visits for patients discharged with wounds before they leave the hospital. Second, the manager can review variable costs, since each dollar saved per visit raises the contribution margin; if a standardized dressing formulary lowered supply costs from $44 to $38 per visit, the contribution margin would rise to $82 and the break-even volume would fall to 299 visits. Third, the manager should present the clinic's value beyond its own budget. Jones et al. (2019) note that programs can generate benefits elsewhere in an organization, and a wound clinic that prevents readmissions and amputations may save the hospital far more than its monthly deficit. Presenting both the break-even analysis and those downstream savings gives administrators a complete picture.

Question 7: How Can the Clinic Show Value Beyond Its Own Budget?

The clinic can show value beyond its own budget by estimating the hospital costs it helps avoid, using a method that assigns a cost to each avoided bed day. A recent example from another specialty shows how this is done. Ombada et al. (2026) evaluated a dedicated day team in a neurosciences intensive care unit that took over lumbar punctures and other time-sensitive tasks from the round-the-clock service. Using time-driven activity-based costing, a method that assigns costs to each step of a care process based on the time and resources it uses, and a cost of $2,500 per hospital day, they estimated that performing procedures earlier shortened length of stay by about two days per lumbar puncture. With roughly 100 procedures a year instead of 23 under the old model, the team saved an estimated $500,000 a year.

The wound clinic could apply the same logic. If the clinic's follow-up visits allowed the hospital to discharge 10 patients a month one day earlier, because a wound check was scheduled before discharge rather than requiring an inpatient stay, then at the same $2,500 per day the hospital would avoid about $25,000 a month in bed-day costs, far more than the clinic's $3,220 monthly deficit. Those figures are assumptions that would need to be confirmed with the hospital's own data, and Jones et al. (2019) caution that savings estimates should state their assumptions clearly. Still, the exercise shows why a program that loses money on its own ledger can be a sound investment for the organization as a whole.

References

Bendich, I., Ford, C., Christy, M., & Nunley, R. M. (2025). Travel staff in total hip arthroplasty is associated with increased operating room costs and decreased efficiency. The Journal of Arthroplasty, 40(S1), S44-S48. https://doi.org/10.1016/j.arth.2025.03.053

Jones, C. B., Finkler, S. A., Kovner, C. T., & Mose, J. N. (2019). Financial management for nurse managers and executives (5th ed.). Elsevier.

Ombada, M., Freeman, W. D., Bechtle, P. S., Ng, L. K., Sanghavi, D. K., & Franco, P. M. (2026). A multifunction neurosciences intensive care unit lumbar puncture service improves efficiency and delivers significant cost savings. Mayo Clinic Proceedings: Innovations, Quality & Outcomes, 10(4), Article 100738. https://doi.org/10.1016/j.mayocpiqo.2026.100738