Hello, I am looking for some confirmation and guidance with the following exerci

Question

Hello, I am looking for some confirmation and guidance with the following exercise. Two previous postings on your site regarding this exact problem have led to more confusion. Here is the assignment: 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 costs of these contracts are $10,000 of which $7,000 are for supplies and items related to each test. She currently charges an average of $10,00 per lab test. She is thinking of lowering her price by 20 percent in hopes of raising her current volume of 10,000 tests by 15 percent. Determine her current and predicted: 1) revenues, 2) variable costs, 3) total contribution margin, and 4) net income. What do you recommend she do? Why? DRAFT RESPONSES: 1) Revenues Current: 10,000 tests @ $10/test = $100,000 Predicted: 11,500 tests @ $8/test = $92,000 2) Variable Costs Current $7,000 Total VC @ 10,000 tests = $.70 VCU Predicted 11,500 tests @.70 VCU = $8,050 Total VC I need help confirming the work above and guidance with the remainder of the exercise. Thank you.

Explanation / Answer

Required her current and predicted: 1) revenues, 2) variable costs, 3) total contribution margin, and 4) net income. What do you recommend she do? Why?

1) Revenues Current: 10,000 tests @ $10/test = $100,000 & Predicted: 11,500 tests @ $8/test = $92,000

2) Variable Costs Current $7,000 Total VC @ 10,000 tests = $.70 VCU & Predicted 11,500 tests @.70 VCU = $8,050 Total VC

3) total contribution margin : Current Total Contribution = 100000 - 7000 = $93000, Contribution margin = 93000/100000 = 93% & Predicted Total Contribution = 92000 - 8050 = $83950, Contribution margin = 83950/92000 = 91.25%

4) net income : Current Net Income = Contribution $93000 - Fixed Cost (10000 -7000) = $90000 & Predicted Net Income = Contribution $83950 - Fixed Cost $3000 = $80950

Recommendation : After the predicted changed, both the contribution and the net income has reduced from 93% to 91.25% and from $93000 to $80950, so it is not recommended to execute the predicted changes.

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