Assume that you have been hired as a consultant to recommend a fixed price (the base rate) that should be proposed in the contract negotiations for Phase 4 hospital services. To help in the analysis, Mark has indicated that approximately 60 percent of nursing, ancillary, operating room, and laboratory costs are fixed. The remaining costs--radiology, drug, and other services--are predominantly variable.

In number 1, how did you get to the final answer of $71,468?

1. What is the estimate of the marginal cost of the Phase 4 hospital services assuming, as given in the case, that 60 percent of the designated costs are fixed and the remaining costs are variable?

Fixed costs = Nursing + Ancillary + Operating Room + Lab Cost

= $13,314 + $53,245 + $5,906 + $8,097

= $80,562

Variable costs = Radiology + Drug + Other Costs

= $1,389 + $15,268 + $22,586

= $39,243

Marginal Cost = $80,562 / ($39,243/12)

= 24.6348

Therefore, the marginal cost estimate is $71,468.

How would you go about answering questions 2 and 3?

2. Assume that the agreed-upon price is $90,000. What is the expected profit on the contract assuming that it brings in 20 new patients? (Assume for now that no new fixed costs would be required.)

3. Now assume that the additional patients will add $200,000 in total to the Center's fixed costs. Now what is the expected profit on 20 new patients? On 40 new patients? (No new fixed costs are required to support the second group of 20 patients.)