Scenario 3: Montgomery Home and Community-Based Services
Montgomery Home and Community-Based Services 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 a three county area, with the majority of the
residents working for the federal and state government. Montgomery relies 100%
on local government funding to provide in home support and homemaker service to
their clients. Their new chief executive officer (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 cafÃ© offering
nutritious breakfast and lunch options.
The CEO has commissioned a needs assessment, and the studyâ€™s results
reveal that there are only 15 retired seniors who would be willing to pay the
monthly fees to access the center. Further results reveal that there are approximately
120 seniors who will be retiring from the government in three years who would
be willing to become members at the center.
The proposed costs to operate this new facility are as follows:
Monthly Fixed Costs
Equipment Maintenance Contract: $200
Membership Fee: $105
Lunch Cost: $25
Breakfast Cost: $15
Based on the information above, the initial investment to establish the
center is $317,880. The organization anticipates that it will generate $25,700
of revenues in the first year, $40,000 in the second year, $78,000 in the third
year, $225,000 in the fourth year, and $310,000 in the fifth 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 if the program is a benefit to the community and if the organization
can recoup its investment in three years. Based on the information presented in
the scenario, calculate the two analyses below and explain their implications.
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 Montgomery Home and Community-Based Services to cover
its monthly expenses.
Break-even volume = Total fixed costs / (Average charge per client â€“ Average
variable cost per client)
2. Calculate the payback period to determine
how long it will take for the organization to recover its initial investment of
establishing the senior multipurpose center.
Payback period = A + (B/C)