Bernard Crandall's Proposal to Dr. Ashwen Although Bernard was quite happy with the treatments that he had received from Dr. Ashwen using NERT, he was concerned about the cost. So, before his next visit, he researched the market price for NERT. One of the alternative medicine practitioners Bernard had visited in the past was Dr. Greco, who practice was a twelve-hour drive away in another state (Bernard had recently moved). Dr. Greco had a national and international reputation as an alternative medicine provider because he traveled 20 weekends per year teaching seminars, at least one of which Dr. Ashwen herself attended. So, Dr. Greco was very reputable, and he treated patients using NERT, charging only $10 per treatment. While sitting in Dr. Ashwen's treatment room, he told her that he wishes to receive NERT but that he is only willing to pay $12.50 per treatment for a total of $100 for eight treatments. Place yourself in Dr. Ashwen's position. How should she respond to Bernard's request? What costs are relevant for Dr. Ashwen's decision about whether to accept or reject Bernard's proposal? Alternative medicaine providers were not so rare that Dr. Ashwen did not have competition. While Bernard was unaware of any other skilled providers for either treatment, Dr. Ashwen was aware that other skilled providers for both treatments were available, both with lower prices and a shorter drive from Bernard's home. TABLE 1 Summary of Dr. Ashwen's Costs $12,195 5,700 6.100 7.250 One-Time Costs (Paid in Full) Purchased treatment table Purchased other miscellaneous equipment Fees and travel incurred for training in AET Fees and travel incurred for training in NERT Recurring (Monthly) Expenses House payment (monthly rent) Misc. house-related fees (utilities, etc.) (average) (monthly) Student loan payment (monthly) (30-year loan, 8% interest) All other living expenses (average) (monthly) Part-time secretary monthly $1.450 210 844 2.220 550 TABLE 2 Summary of Dr. Ashwen's Revenues Chiropractic revenue (average) [Time per treatment = 10 minutes] $75 per treatment AET revenue [Time for two treatments = 15 minutes] $50 per treatment $50 per treatment NERT revenue [Time for eight treatments = 15 minutes] Percent of revenue from chiropractic treatments Percent of AETS Percent of revenue from NERTS 75% 15% 10% Case Questions 1) How much sales revenue is Dr. Ashwen generating per hour? Specifically, how much would she earn if she completed only chiropractic treatments for an hour? Only AETs for an hour? Only NERTs for an hour? (3 points) 2) Dr. Ashwen is growing concerned about recovering the costs she incurred learning AET and NERT. She wants to know how many hours she must spend treating patients with AET to recover (i.e., breakeven) the cost of learning AET. Similarly, how many hours must she spend treating patients with NERT to recover the cost of learning that procedure? (Note: when performing these calculations, you are the right track if you conclude that there are no variable costs.) (6 points) 3) Dr. Ashwen is also concerned about meeting her monthly financial obligations. Perform multiproduct breakeven to determine how many hours per month she must work to cover her total monthly expenses. (As a hint, hours per month is like your Q in break-even analysis. Although we never solved for Q in a multi-product break-even analysis in class, here it is relatively simple because there are no variable costs. As a result, all you need to determine is a product-weighted average sales price for the total product mix that Dr. Ashwen will use to cover her fixed costs. To calculate this product- weighted or service-weighted sales price, first calculate the proportion of each hour of total sales revenue that would be allocated to each type of service (e.g., Chiropractic Revenue per Hour x % of Revenue Service Weight Revenue per Hour). Then, sum those weights to obtain the product mix sales price, which is also your contribution margin due to the lack of variable costs. Plug this into the break-even formula to determine Q.) (3 points)
