In January, Donald Hoover, program coordinator of the Springfield Handyman Program was in deciding whether to employ full time handymen or to subcontract services from a local general contractor on a daily basis. Inasmuch as the program was experiencing some financial difficulties, he knew that this decision could have some important consequences for its financial viability.
BACKGROUND
The Springfield Handyman Program was a division of the Springfield, Oregon Community Visiting Nurse Association (VNA). The program had been initiated as part of an effort to develop services that were needed by the elderly in the community, but that historically had been provided by for-profit organizations. The hope was that the handyman program could eventually subsidize other, less-financially-viable, programs in the VNA. Unfortunately, because of the program's financial difficulties, just the opposite had been taking place. Mr. Hoover had been hired with the explicit mandate to put the program on a sound financial footing.
REVENUE AND EXPENSES
The fixed costs of the handyman program were estimated to be $900 a month for rent and other expenses. The variable costs of supplies (measured on a per-day-of-service basis) were expected to be $80. Mr. Hoover believed that the program could collect revenue of $200 per day of service.
In terms of personnel, Mr. Hoover saw two options. The first was to hire full time handymen to meet expected demand each month. Each person would work a maximum of twenty days per month. His or her monthly salary would be $1500, regardless of the number of days actually worked during the month.
The second option was to contract services as needed from the general contractor. The rate, which Mr. Hoover found to be competitive with other general contractors in the area, was $100 per day of service. As was customary in the industry, partial days would be billed at the full rate.
With this information on revenue and expenses, Mr. Hoover felt he could calculate a breakeven for each option, and use this as a basis for making his decision.
Assignment
- Calculate the breakeven for each option. Why do these breakeven volumes differ?
- Which option is preferable? Why?
- What other factors or options should Mr. Hoover consider?
- What should Mr. Hoover do?