8. A medical expenses billing firm wishes to hire a software firm to design its
ID: 1191705 • Letter: 8
Question
8. A medical expenses billing firm wishes to hire a software firm to design its software to more efficiently handle its billing. Having the programming redesign is worth $1.5 million to the billing firm. The software firm can write and install new programs for $1.1 million. Because the software is specifically designed for the billing firm, it is worth only $.8 million to other firms.
(a) What price might the parties agree upon for the software? Explain.
(b) Describe a case where the billing firm holds-up the software firm for a lower price. What happens to the profit of each party in this case? Will the software firm go through with deal?
Explanation / Answer
Solution :
The cost to the billing firm = $ 1,500,000
The cost to the software company for redesigning = $ 1,100,000
The cost to other firms = $ 800,000
The profit made by the software company by selling to billing firm = $ 400, 000
The % percentage profit made by the software company by selling to the billing firm = 36.36 %
The software firm can price the software at 36.36 % less than the total cost incurred by the firm
The cost incurred by the slftware company = $ 1,100,000
Price of the software = $ 1,100,000 - 0.3636 X 1,100,000
Price of the software = $ 700,040
The profit made by selling 2 units i.e one to medical billing firm and one to other firm
Profit = Revenue - cost
Profit = $ 700,040 X 2 - $ 1,100,000
Profit = $ 300,080
b) If the billing firm holds up the software company for a lower price , the profits of the software company will go down drastically , and the medical billing firm will make huge profits if it buys the software at a lower price . The software firm may not agree to go through this deal .
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