Question 1 B

An insurance company desires to enter the health care market and offer its potential customers both a staff model health maintenance organization (HMO) and commercial indemnity insurance. The company is deciding how to allocate its marketing efforts between those options to maximize its profits. The analysts have estimated that the company will realize a profit of $1,200 per enrollee from the HMO, and $600 per enrollee from commercial plans. Furthermore, for the coming year the company is forced to rely on its present resources in terms of sales force. The administrative support of the HMO will take two hundred hours, and the commercial administration will take, on average, four hundred hours; currently, the company can allocate 1.6 million hours to sales. To break even, the HMO requires that the contribution margins (contribution margin is sales revenue less variable costs; it is the amount available to pay for fixed costs and then provide any profit after variable costs have been paid) for enrollees must exceed $1.5 million. The estimated contribution margins are $500.00 and $300.00, for HMO and for commercial insurance enrollees, respectively. With a limited number of physicians participating in the staff model HMO at the present time, the HMO can handle at most 5,000 enrollees.

a) Formulate the problem

b)Solve graphically- (submit on scanned graph paper)

c)Solve in excel using the template provided