Allied Laboratories is combining some of its most common tests into one-price pa

Question

Allied Laboratories is combining some of its most common tests into one-price packages.
One such package will contain three tests that have the following variable costs:
Test A Test B Test C
Disposable syringe $3.00 $3.00 $3.00
Blood vial 0.50 0.50 0.50
Forms 0.15 0.15 0.15
Reagents 0.80 0.60 1.20
Sterile bandage 0.10 0.10 0.10
Breakage/losses 0.05 0.05 0.05
1 4 2 F u n d a m e n t a l s o f H e a l t h c a r e F i n a n c e
When the tests are combined, only one syringe, form, and sterile bandage will be used.
Furthermore, only one charge for breakage/losses will apply. Two blood vials are required
and reagent costs will remain the same (reagents are required for all three tests).
a. As a starting point, what is the price of the combined test assuming marginal cost
pricing?
b. Assume that Allied wants a contribution margin of $10 per test.What price must be
set to achieve this goal?
c. Allied estimates that 2,000 of the combined tests will be conducted during the first
year. The annual allocation of direct fixed and overhead costs total $40,000.What
price must be set to cover full costs?What price must be set to produce a profit of
$20,000 on the combined test?
Consider the CVP graphs below for two providers operating in a fee-for-service environment:
1 4 3
a. Assuming the graphs are drawn to the same scale, which provider has the greater
fixed costs? The greater variable cost rate? The greater per unit revenue?
b.Which provider has the greater contribution margin?
c.Which provider needs the higher volume to break even?
d. How would the graphs change if the providers were operating in a discounted feefor-
service environment? In a capitated environment?

Explanation / Answer

Assuming the graphs are drawn to the same scale, which provider has the greater fixed costs? The greater variable cost rate? The greater per unit revenue

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