15. Determining break-even price in a reduce-or-expand decision. QuickCare is a

Question

15. Determining break-even price in a reduce-or-expand decision. QuickCare is a health care franchise that functions as a primary family health clinic, seeing unscheduled patients twenty-four hours a day. Several months after the grand opening, a corporate office management engineering study showed that the clinic was experiencing some dips in volume in the mid-afternoon hours. To increase volume, efficiency, and revenues, the clinic administrator contracted with the area high schools to provide after-school physi- cals for the sports teams. The initial agreement was that QuickCare would charge $150 per exam, the market average. Fixed costs were $50,000 and variable costs were $55 per physical. Although this strategy proved somewhat successful, gross profit margin lagged behind the corporate expectations. To improve its margin, the clinic is considering increas- ing the exam price to $175. QuickCare’s administrator projects that this price increase will cause the high schools to send their athletes to other providers and that volume could drop by 33 percent. Last year QuickCare performed 1,500 examinations. The administrator feels that if the program closes down, all $50,000 in fixed costs would be saved.

a. What should QuickCare’s decision be, assuming that this price increase would decrease the number of patients seen by one-third?

b. What price would QuickCare have to charge to make up for the loss of patients?

c. Using the information from the answer to question a, should QuickCare make the same decision if 40 percent of the fixed costs are avoidable? Would it be better or worse off? Why?

Explanation / Answer

a) Effect on net profit

Selling price @150

(1500 units)

Selling price @175

(1005 units)

Qucik care's decision should be to continue with old price

b)

Selling price @150

(1500 units)

Selling price @175

(1005 units)

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