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. TABLE 1 University Transplant Center Phase 4 Hospital Costs Total Costs Nursing Ancillary Cost Cost OR Cost Lab Cost Radiology Drug Cost Cost Other Costs Patient Age LOS 25 15 cm OA 14 UHYH OO NUONNNO $141,092 139,306 74,259 115, 349 172,613 83,807 136,060 139,308 74,259 115, 348 166, 224 80,034 $10, 261 11,969 6,939 7,221 28, 205 16,858 9,645 11,969 6,939 7, 221 26,909 15,629 $65, 416 63,668 33, 661 54,063 72,204 33,474 63,208 63,669 33,660 54,063 69,657 32,202 $6,770 8,501 3,128 5,779 6,847 4,654 6,489 8,501 3,128 5,778 6,765 4,531 $13,712 7,409 5,279 6,112 10,550 6,211 13,091 7,409 5,280 6,111 10,061 5,937 $1,483 2,261 668 903 1,766 1,397 1,382 2,261 $20,992 24,504 6,964 7,638 23,061 9, 698 20,127 24,505 6,964 7,639 22,007 9,122 $22,458 20,994 17,620 33,633 29,980 11,515 22,118 20,994 17,620 33,633 29,148 11,320 903 1,677 1,293 21 Average 47 19 $119,805 $13,314 $53,245 $5,906 $8,097 $1,389 $15,268 $22,586 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? 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.) 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. TABLE 1 University Transplant Center Phase 4 Hospital Costs Total Costs Nursing Ancillary Cost Cost OR Cost Lab Cost Radiology Drug Cost Cost Other Costs Patient Age LOS 25 15 cm OA 14 UHYH OO NUONNNO $141,092 139,306 74,259 115, 349 172,613 83,807 136,060 139,308 74,259 115, 348 166, 224 80,034 $10, 261 11,969 6,939 7,221 28, 205 16,858 9,645 11,969 6,939 7, 221 26,909 15,629 $65, 416 63,668 33, 661 54,063 72,204 33,474 63,208 63,669 33,660 54,063 69,657 32,202 $6,770 8,501 3,128 5,779 6,847 4,654 6,489 8,501 3,128 5,778 6,765 4,531 $13,712 7,409 5,279 6,112 10,550 6,211 13,091 7,409 5,280 6,111 10,061 5,937 $1,483 2,261 668 903 1,766 1,397 1,382 2,261 $20,992 24,504 6,964 7,638 23,061 9, 698 20,127 24,505 6,964 7,639 22,007 9,122 $22,458 20,994 17,620 33,633 29,980 11,515 22,118 20,994 17,620 33,633 29,148 11,320 903 1,677 1,293 21 Average 47 19 $119,805 $13,314 $53,245 $5,906 $8,097 $1,389 $15,268 $22,586 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? 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.)
