Question

Maryland Home and Community-Based Services (MHCBS) is considering a major expansion that will enable it to attract a different clientele to its organization. Currently, they serve only 34% of the frail elderly seniors and persons with disabilities in the local area. The new chief CEO would like the organization to expand its revenue stream by investing in a senior multipurpose center serving healthy seniors by offering them arts and crafts and health and wellness programs. The center will also contain an Internet café offering nutritious breakfast and lunch options.

The CEO has commissioned a needs assessment, and the study’s results reveal that there are approximately 120 seniors in the local community who are interested in this center and the CEO expects growth of the aging population to be at least 10% each year. Cost growth across all areas of expense is expected to rise by 5% each year. The CEO has presented her proposal and financial information to the Board of Directors, and they have advised her that they are in full support of her strategy only if the program is a benefit to the community and if the organization can recoup its investment in five years. The CEO has asked you if this can be achieved. Based on the information presented in the scenario, calculate the two analyses and explain, in a brief memorandum to the CEO, their implications.

The proposed costs to operate this new facility are as follows:

Expected Monthly Revenue (Membership Fee): $125 per person

Monthly Fixed Costs

Utilities: $590

Health/Wellness Staff: $2,500

Arts/Crafts Staff: $2,000

Supplies: $800

Fitness Equipment Maintenance Contract: $200

Variable Costs

Monthly Lunch Cost: $25

Monthly Breakfast Cost: $15

Based on the information above, once the minimum threshold of participants is reached, the initial investment to establish the center is $317,880. The organization anticipates that it will generate $46,920 of net revenues in the first year, $68,166 in the second year, $93,404 in the third year, $123,287 in the fourth year, and $158,573 in the fifth year.

The Assignment

1) Perform the break-even analysis to determine how many seniors would need to have full monthly membership and pay for breakfast and lunch for UMUC Home and Community-Based Services to cover its monthly expenses.

2) Calculate the payback period to determine how ling it will take for the organization to recover its initial investment of establishing the senior multipurpose center.

3) Should MHCBS invest in a multipurpose Senior Center to expend its service offerings to appeal to the growing senior market in the area? Provide evidence that the expanded program is a benefit to the community and a break-even analysis that indicated MHCBS can recoup its investment in five years.

4) Based on the analysis explain in a brief memo whether the program can and will meet the requirements.

Break-Even Point (Units) = Fixed Costs / (Revenue per Unit - Variable Cost per Unit)

Thank You!

Answer 1

Ans
1	Membership Fee per person (revenue)	$125
	Less:
	Variable Costs
	Monthly Lunch Cost:	($25)
	Monthly Breakfast Cost:	($15)
	Contribution per person	$85
	Fixed Cost
	Utilities:	$590
	Health/Wellness Staff:	$2,500
	Arts/Crafts Staff:	$2,000
	Supplies:	$800
	Fitness Equipment Maintenance Contract:	$200
	Total Fixed Cost	$6,090
	Break even point=Total fixed cost/contribution per person
	Break even point=6090/85
	Break even point	71.65
	Hence approx 72 seniors would need to have full monthly membership and pay for breakfast and lunch.
2	Calculation of payback period
	Initial Investment required	$        3,17,880
	net revenue estimated		Cumulative revenue
	First year	$46,920	$46,920
	Second year	$68,166	$1,15,086
	third year	$93,404	$2,08,490
	fourth year	$1,23,287
	fifht year	$1,58,573
	Total revenue estimated	$4,90,350
	Shortfall after third year	$317880-208490
	Shortfall after third year	$        1,09,390
	Per month income in fourth year	123287/12
	Per month income in fourth year	$            10,274
	number of month required in fourth year	$109390/$10274
	number of month required in fourth year	11
	Hence payback period is 3 years and 11 months
	Organization will take 3 years and 11 month to recover the initial investment
3	Based on above it is clear that organization will recover its investment in 3 years & 11 months
	hence it should go for the investment.
	It will overall beneficial for the organization as total estimated income is more than the initial investment
4	The program should be implemented as it will boost the market share
	and eventually the initial investment is recovered before 5 years as asked by the board of directors.