Question

Janet Gilbert is director of labs. She has some extra capacity and has contracted with some small neighboring hospitals to run some of their lab tests. She has recently had a study conducted and has determined that her cost for these contracts are $50,000, of which $7000 is the variable cost of supplies. The rest is not avoidable fixed cost. She currently charges an average of $20 per test. She is thinking of lowering her price by 20% in hopes of raising her current volume of 10,000 tests by 15 percent. If she does so, she expects her variable cost per test will go up by 4 percent. Determine the current and predicted: revenues, variable costs, and total contribution margin and product margin. What do you recommend she do? Why?

Answer 1

Janet Gilbert spends 7000$ on variable cost of supplies

And rest 43000$ is the unavoidable fixed cost .

Currently she is taking 20$ for a test and she planning to reduce it to 20% means to 16$ so that she can increase the number of volumes from 10000 to 11500 .

If she does this , then her variable cost will go up by 4% means the variable cost will become 7280 $.

It's totally a loss for her if she decrease the rates per test to increase the number of volumes because when she had 10000 volume with a rate of 20$ ,she used to earn 200000$ but if she decreases the rate to $16 to increase the volume by 11500 she will get only 184000$ ,then what is the profit left , it will only increase the expenses . It's better not to decrease the rate .