Compute The Contribution Margin For Greenside Clinic

Compute The Contribution Margin For Greenside Clinicthe Mental Health

Compute the contribution margin for Greenside Clinic The mental health program for the community center has just completed its fiscal year end. The program director determines that his program has revenue for the year of 1,210,000. He believes his variable expense amounts to 205,000 and he knows his fixed expense amounts to 1,100,000. 1. C1. 1.Compare the contribution margin for the Community Health Program. 2. 2 2. What does the result tell you about the program?

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The contribution margin (CM) is a critical financial metric used to assess the profitability of a specific program or product by calculating the difference between total revenue and total variable expenses. In the context of Greenside Clinic’s mental health program, it provides insight into how much revenue remains after covering variable costs, contributing towards covering fixed costs and generating profit. Given the provided data, the detailed calculation and interpretation of the contribution margin help evaluate the program's financial health and operational efficiency.

The first step in analyzing Greenside Clinic’s mental health program involves calculating its contribution margin. The program’s total revenue for the fiscal year is reported as $1,210,000. The variable expenses, which vary directly with the level of activity, amount to $205,000. Fixed expenses, which remain constant regardless of activity levels, total $1,100,000. These figures allow us to compute the contribution margin as follows:

Contribution Margin (CM) Calculation:

\[ CM = Revenue - Variable Expenses \]

\[ CM = 1,210,000 - 205,000 = 1,005,000 \]

This contribution margin signifies that after accounting for variable expenses, the program retains $1,005,000 to cover fixed expenses and contribute to profit.

Next, to understand the proportion of revenue that contributes to covering fixed costs and profit, calculating the contribution margin ratio is informative:

\[ CM\ Ratio = \frac{Contribution\ Margin}{Revenue} \]

\[ CM\ Ratio = \frac{1,005,000}{1,210,000} \approx 0.8306 \ (or\ 83.06\%) \]

This indicates that approximately 83.06% of the revenue from the mental health program is available to cover fixed costs and profit after variable expenses are deducted.

Comparing this contribution margin with other community health programs can provide valuable context. For example, if similar programs have lower contribution margins—say 60-70%—Greenside Clinic’s mental health program is relatively efficient in managing variable costs and generating surplus revenue to offset fixed costs. Conversely, if other programs exhibit higher contribution margins, it might suggest more cost-effective operations or different revenue structures.

Interpreting the contribution margin in the context of fixed costs is essential. The fixed expenses, totaling $1,100,000, require coverage regardless of the program’s performance. With a contribution margin of $1,005,000, the program falls just short of covering fixed costs entirely, implying a potential operational loss of $95,000 ($1,100,000 - $1,005,000). This finding underscores that, despite generating substantial revenue, the program might not be financially self-sustaining without adjustments to either cost management or revenue generation.

The analysis indicates that if Greenside Clinic’s mental health program aims to become profitable or at least break even, it needs to either increase revenue, reduce variable costs, or decrease fixed expenses. For instance, improving operational efficiency could lower variable expenses, or expanding service offerings could boost revenue. Alternatively, securing additional funding or grants may help offset fixed costs.

Moreover, understanding the contribution margin provides strategic insights for decision-making. The clinic can evaluate whether to continue, expand, or modify the program, considering its current financial contribution. It also informs resource allocation decisions—directing efforts toward activities that improve contribution margins can optimize overall sustainability.

In conclusion, the contribution margin of approximately $1,005,000 and a ratio of about 83.06% indicates that Greenside Clinic’s mental health program has a strong capacity to generate revenue after variable costs. However, the relatively high fixed expenses beyond the contribution margin suggest a need for strategic adjustments to achieve financial sustainability. Continuous monitoring and analysis of contribution margins across programs are essential for effective fiscal management and ensuring the community’s health needs are met sustainably.

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