Student name

Walden University

DNRS 6211: Finance and Economics in Healthcare Delivery

Professor Name

Submission Date

W8A5 Marginal Profit and Loss

Refer to the Healthcare Budget Guide for directions on completing this Marginal Profit and Loss scenario

Marginal Profit and Loss Statement Scenario

You are examining a proposal for a new business opportunity – a new procedure for which demand is expected to be 1,400 units the first year, growing by 600 units each year thereafter. The price charged per procedure is $1,000. The collection rate is anticipated to be 80%. Each procedure consumes $300 of supplies. Salary cost is estimated to cost $540,000 each year, fringe benefits are 25% of salaries, rent for the facility is $55,000/yr and operating cost are $120,000/yr.

Question: Below is a marginal P&L for this business opportunity. Based on that analysis, should this opportunity be pursued. Explain your decision.

Answer: Based on the Marginal Profit and Loss (P&L) analysis, this business opportunity should be pursued. Although the business incurs a loss of $150,000 in Year 1, this is typical for new ventures, where initial setup and operational costs often outweigh the early-stage revenue. The real potential of this opportunity lies in its growth trajectory. From Year 2 onward, the business becomes profitable, with annual profits steadily increasing. By Year 2, the business generates $120,000 in profit, and by Year 5, this grows to $805,330. This shows a clear pattern of financial improvement as the volume of procedures increases each year. Additionally, the cumulative profit margin turns positive starting from Year 3, reaching over $1.7 million by Year 5, indicating long-term profitability.

The costs, both fixed and variable, are manageable, and the business is expected to benefit from increasing units of volume each year. The stable price and collection rate further ensure that the revenue per procedure remains consistent. Given the scalability of the business model and the strong growth in profits, the venture is likely to become highly profitable in the medium to long term. In a nutshell, while the first year presents a challenge, the increasing profitability in subsequent years and the sustainable growth model make this opportunity a promising investment. Therefore, it should be pursued with confidence.