5. Janet Gilbert is director of labs. She has some extra capacity and has contra

Question

5. Janet Gilbert is director of labs. She has some extra capacity and has contracted with some small neighboring hospitals to run some of their lab tests. She has recently had a study conducted and has determined that her costs of these contracts are $10,000 of which $7,000 are for supplies and items related to each test. She currently charges an average of $1000 per lab test. She is thinking of lowering her price by 20 percent in hopes of raising her current volume of 10,000 tests by 15 percent. Determine her current and predicted: 1) revenues, 2) variable costs, 3) total contribution margin, and 4) net income. What do you recommend she do? Why?

Explanation / Answer

Particulars Actual   Predicted Revenues 10000*1000=                                                1000,00,000.00 11500*800                                                                  920,00,000.00 Less: Variable cost 7000*10000                                                  700,00,000.00 7000*11500                                                                  805,00,000.00 Contribution                                                  300,00,000.00                                                                  115,00,000.00 Less: Fixed Cost                                                             3,000.00                                                                             3,000.00 Net Income                                                  299,97,000.00                                                                  114,97,000.00 The reduction in price is not advisable

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