7.3 Allied Labortories is combining some of its most common tests into one-price
ID: 2685792 • Letter: 7
Question
7.3 Allied Labortories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs. Test A Test B Test C Disposable syringe 3.00 3.00 3.00 Blood vial 0.50 0.50 0.50 Forms 0.15 0.15 0.15 Reagents 0.80 0.60 1.20 Sterile bandage 0.10 0.10 0.10 Breakage/losses 0.05 0.05 0.05 When the tests are combined, only one syringe, form, and sterile bandage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vials are required, and reagent costs will remain the same (reagents from all three tests are required) a. As a starting point, what is the price of the combined test assuming marginal costs pricing? b. Assume that Allied wants a contribution margin of $10 per test. What price must be set to achieve this goal? c. Allied estimates that 2,000 of the combined tests will be conducted during the first year. The annual allocation of direct fixed and overhead costs total $40,000. What price must be set to cover full cost? what price must be set to produce a profit of 20,000 on the combined test?Explanation / Answer
7.3 a.
Calculation
Combined Cost
Disposable Syringe
1*3
$3.00
Blood Vial
2*0.5
$1.00
Forms
1*0.15
$0.15
Reagents
0.8+0.6+1.2
$2.60
Sterile Bandage
1*0.1
$0.10
Breakage/Losses
1*0.05
$0.05
Total Variable Cost
$6.90
b.
Combined
Per Test
Total Variable Cost
$6.90
$2.30
Required Contribution Margin
$30.00
$10.00
Selling Price
$36.90
$12.30
c.
Total Tests
2,000
Total Variable Cost (2,000*$6.90)
$13,800
Total Fixed Cost
$40,000
Total Cost
$53,800
Selling Price Per Unit ($53,800/2000)
$26.90
To allow for total cost to be covered selling price per unit must be $26.90.
Break Even Sales
$53,800
Required profit
$20,000
Total Sales
$73,800
Total Units
2,000
Selling Price Per Unit ($73,800/2000)
$36.90
In order to have a $20,000 profit the selling price per unit must be $36.90.
Calculation
Combined Cost
Disposable Syringe
1*3
$3.00
Blood Vial
2*0.5
$1.00
Forms
1*0.15
$0.15
Reagents
0.8+0.6+1.2
$2.60
Sterile Bandage
1*0.1
$0.10
Breakage/Losses
1*0.05
$0.05
Total Variable Cost
$6.90
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