Integrated Health Associates (IHA) has the following cost structure: For parts (

Question

Integrated Health Associates (IHA) has the following cost structure: For parts (a) and (b), assume IHA is a price setter. What is the minimum price per visit IHA should set using marginal cost pricing? Assume IHA sets a price of S50 per visit. Does this reflect a marginal cost pricing strategy or a full cost pricing strategy? How do you know? Now assume the market price per visit is $45 and IHA is a price taker. What target average cost per visit must IHA achieve to earn a profit of $50,000? Is the target cost higher or lower than their current average cost per visit?

Explanation / Answer

(a) Minimum price per visit as per marginal cost pricing is equal to variable cost plus a little profit.

Hence , the minimum price as per marginal cost pricing = $ 20

(b) If the price is = $ 50 , then it is full costing pricing strategy .

Fixed Cost per unit = 120000/4000 = 30

Variable cost per unit = 20

Total per unit = 50

Hence $ 50 is pricing on full costing strategy

(c) Selling Price = 45

Variable Price = 25

Contribution per unit = 45 -20 = 25   

   Fixed cost per unit = 120000/4000 = 30

   Loss = -5 per unit

   Loss = -5 * 4000 = -20000

   Desired profit = 50000

   profit per unit = 50000/4000 = 12.50

   Hence total cost = Selling price - Profit

   = 45 - 12.50

   = 32.50

Hence average cost per visit to make a profit of 50000 should be 32.50

The target cost ( 32.50 ) is lower than their current average cost per visit (50)

Hence, profit to be earned from 4000 units = +50000 + 20000 = 70000

Hence number of visits required = 170000/25 =

D

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