7.3 Allied Laboratories is combining combing some of its most common tests into

Question

7.3 Allied Laboratories is combining combing 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                                  .50                               .50                               .50

Forms                                          .15                               .15                               .15

Reagents                                     .80                               .60                           1.20

Sterile Bandage                           .10                               .10                               .10

Breakage/losses                           .05                               .05                              .05

When the test are combined, only one syringe, form, and sterile bandage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vitals are required, and reagent costs will remain the same (reagents from all three tests are required).

    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 cost 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?

Explanation / Answer

A. Assuming marginal cost pricing, and combining all the three tests together as one, the total cost will be : $ Syringe             3.00 Blood Vials             1.00 Forms             0.15 Reagents             2.60 Sterile Bandage             0.10 Breakage/Losses             0.05             6.90 B. To achieve a contribution margin of $10 per test, the price to be set will be $ 10 + $ 6.90 = $ 16.90. C. 2,000 tests will be conducted during the year Assume that the price per test is X Since the price of the tests must cover full costs, hence 2,000 * X = 2,000 * 6.90 $ + 40,000 $ Therefore, X =           26.90 $ To produce a profit of 20,000 $ on the combined test Assuming that the price per test is X 2,000 * X - 2,000 * 6.90 - 40,000 $ = 20,000 $ Therefore, X =           36.90 $

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