Allied Laboratories has decided to combine some of it tests into packages. One of these packages will contain three tests that have the following variable costs:

Test A Test B Test C

Disposable Syringes $3.00 $3.00 $3.00

Blood Vials $0.50 $0.50 $0.50

Forms $0.15 $0.15 $0.15

Reagents $0.80 $0.60 $1.20

Bandages $0.10 $0.10 $0.10

Breakage/Loss $0.05 $0.05 $0.05

When the tests are combined, only one syringe, form, and sterile bandage will be used. Only one charge for Breakage/Loss will be incorporated. Two blood vials are required, and reagent costs will remain the same (reagents from all three tests are required).

As a starting point, what is the price of the combined test assuming marginal cost pricing?

Assume that the allied wants a contribution margin of $10 per test. What price must be set to achieve this goal?

Allied estimates that 2,000 of the combined tests will be conducted during the first 1 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?

Solution

7.4 Assume the Valley Forge Hospital has only the following three payer groups

Number of Average Revenue Variable Cost per

Payer Admissions per admission Administration

PenCare 1,000 5,000 3,000

Medicare 4,000 4,500 4,000

Commercial 8,000 7,000 2,500

The hospitals fixed costs are $38 Million

a). What is the hospitals net income?

b). Assume that half of the 100,000 covered lives in the commercial payer group will moved into the capitated plan. All the utilization and cost data remain the same. What PMPM rate will the hospital have to charge to retain its part a net income?

c). what overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10%

d). Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for the capitate group were lowered to $2,200?